Palmnet: A pension asset and liability model for the Netherlands
AbstractThis study presents a pension model geared to the typical pension contract in the Netherlands. It is based on a defined benefit/average earnings pension system. Nominal benefits are guaranteed and indexation is intended. The model provides a framework for analysing adjustments to such factors as the asset mix, retirement age, returns and the method of discounting, premium setting and indexation. The importance of uncertainty over interest rate movements and returns on shares is made explicit by means of stochastic and historical simulations. In this, PALMNET differs from existing, often deterministic pension models. The main findings are, first, a wage -indexed defined benefit pension is still affordable despite the current shortfall of wealth of pension funds. Second, fair value accounting considerably increases the volatility of pension premiums. Third, reducing risks by adjusting the asset mix towards more bonds is costly in terms of average premiums, but reduces the volatility. These conclusions are based on realistic to conservative assumptions regarding returns and risks.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 760.
Length: 50 pages
Date of creation: Jun 2004
Date of revision:
Actuarial pension model; Monte Carlo simulation; historical simulation;
Find related papers by JEL classification:
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- C59 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Other
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
- J18 - Labor and Demographic Economics - - Demographic Economics - - - Public Policy
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