Evaluating the Design of Private Pension Plans: Costs and Benefits of Risk-Sharing

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Evaluating the Design of Private Pension Plans: Costs and Benefits of Risk-Sharing

Author Info

Hans Blommestein
Pascal Janssen
Niels Kortleve
Juan Yermo

Abstract

The principal purpose of this paper is to analyse the trade-off between the uncertainty in contributions on the one hand and benefits on the other that is embedded in different pension arrangements. The paper employs the funding ratio (ratio of assets to liabilities) and the replacement rate (ratio of benefits to salaries) as key criteria for evaluating the risk sharing characteristics of a private pension plan from the perspective of the plan member. The stochastic simulations performed show that hybrid plans (those in between traditional DB and individual DC) appear to be more efficient and sustainable forms of risk sharing than either of the other two. Of the three main hybrid plans analysed, conditional indexation plans appear to have the greatest potential as sustainable forms of risk sharing.

Évaluer la conception des plans de pension privés : coûts et avantages du point de vue du partage des risques
Le principal objectif de ce document est d'analyser l'arbitrage entre le degré de certitude (d'incertitude) des cotisations, d'une part, et des prestations, d'autre part, inscrit dans les différents systèmes de pension. Le coefficient de capitalisation (rapport des actifs aux engagements) et le taux de remplacement (rapport entre les prestations et le salaire) sont les critères clés considérés pour évaluer les caractéristiques en termes de partage des risques des plans de pension privés du point de vue de l'adhérent à un plan. Les simulations stochastiques réalisées montrent que les plans hybrides (plans qui se situent entre les traditionnels plans à prestations définies et les plans à cotisations définies individuels) semblent être une forme de partage des risques plus efficiente et plus viable que les deux autres. Parmi les trois grands types de plans hybrides analysés, les plans à indexation conditionnelle semblent les plus aptes à assurer un partage des risques de façon pérenne.

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Paper provided by OECD, Directorate for Financial and Enterprise Affairs in its series OECD Working Papers on Insurance and Private Pensions with number 34.

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Date of creation: Mar 2009
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Handle: RePEc:oec:dafaab:34-en

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Find related papers by JEL classification:
G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions
J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Private Pensions

This paper has been announced in the following NEP Reports:

NEP-ALL-2009-04-18 (All new papers)

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This page was last updated on 2009-11-17.

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