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Utility-equivalence of pension security mechanisms

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  • Dirk Broeders
  • An Chen
  • Birgit Koos
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    Abstract

    Adequate funding of occupational pension plans is key to benefit security. Across countries different methods of securing funding exist: solvency requirements, a pension guarantee fund, and sponsor support. The key goal of this paper is to investigate the welfare implications to the beneficiary in a hybrid pension scheme. We show that the three security mechanisms can be made utility-equivalent by adjusting the pension contract specifications. The utility-equivalence approach could serve to strengthen the \holistic balance sheet" approach as advised by EIOPA. It enables regulators to compare various pension systems across Europe in a single framework from a utility perspective instead of a valuation perspective.

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    File URL: http://www.dnb.nl/en/binaries/Working%20Paper%20414_tcm47-302773.pdf
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    Bibliographic Info

    Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 414.

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    Date of creation: Jan 2014
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    Handle: RePEc:dnb:dnbwpp:414

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    Related research

    Keywords: Pension plans; pension regulation; guarantee systems; power utility; certainty equivalents;

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    1. J.A. Bikker & D.W.G.A Broeders & Jan de Dreu, 2007. "Stock market performance and pension fund investment policy: rebalancing, free float, or market timing," Working Papers 07-27, Utrecht School of Economics.
    2. Chen, An, 2011. "A risk-based model for the valuation of pension insurance," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 401-409.
    3. Alexander Kling & Andreas Richter & Jochen Ru�, 2007. "The Impact of Surplus Distribution on the Risk Exposure of With Profit Life Insurance Policies Including Interest Rate Guarantees," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 74(3), pages 571-589.
    4. Laura Ballotta & Steven Haberman & Nan Wang, 2006. "Guarantees in With-Profit and Unitized With-Profit Life Insurance Contracts: Fair Valuation Problem in Presence of the Default Option," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(1), pages 97-121.
    5. Grosen, Anders & Løchte Jørgensen, Peter, 2001. "Life Insurance Liabilities at Market Value," Finance Working Papers 01-4, University of Aarhus, Aarhus School of Business, Department of Business Studies.
    6. Robert C. Merton & Zvi Bodie, 1992. "On the Management of Financial Guarantees," Financial Management, Financial Management Association, vol. 21(4), Winter.
    7. Dirk Broeders & An Chen, 2010. "Pension benefit security: a comparison of solvency requirements, a pension guarantee fund and sponsor support," DNB Working Papers 268, Netherlands Central Bank, Research Department.
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