IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Minimum funding ratios for defined-benefit pension funds

  • SIEGMANN, ARJEN

We compute minimum funding ratios for Defined Benefit (DB) plans based on the expected utility that can be achieved in a Defined Contribution (DC) pension scheme. Using Monte Carlo simulation, expected utility is computed for three different specifications of utility: power utility, mean-shortfall and mean-downside deviation. Depending on risk aversion and the level of sophistication assumed for the DC-scheme, minimum acceptable funding ratios are between 0.87 and 1.20. If the DC-scheme is constrained to a fixed-contribution setup, minimum funding ratios are between 0.87 and 0.98. Furthermore, the attractiveness of the DB plan increases with the expected equity premium and the fraction invested in stocks. We conclude that the expected value of intergenerational solidarity, implicit in the DB pension fund, can be large. Given a pension fund with a funding ratio of 1.30, a participant in a DC plan has to pay a 2.7 to 6.1%-point higher contribution to achieve equal expected utility.

(This abstract was borrowed from another version of this item.)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://journals.cambridge.org/abstract_S1474747210000296
File Function: link to article abstract page
Download Restriction: no

Article provided by Cambridge University Press in its journal Journal of Pension Economics and Finance.

Volume (Year): 10 (2011)
Issue (Month): 03 (July)
Pages: 417-434

as
in new window

Handle: RePEc:cup:jpenef:v:10:y:2011:i:03:p:417-434_00
Contact details of provider: Postal: Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK
Web page: http://journals.cambridge.org/jid_PEF
Email:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Tim Besley & Andrea Prat, 2003. "Pension fund governance and the choice between defined benefit and defined contribution plans," IFS Working Papers W03/09, Institute for Fiscal Studies.
  2. Christian Gollier, 2005. "Optimal Portfolio Management for Individual Pension Plans," CESifo Working Paper Series 1394, CESifo Group Munich.
  3. Gollier, Christian, 2007. "Intergenerational Risk-Sharing and Risk-Taking of a Pension Fund," IDEI Working Papers 42, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Maarten van Rooij & Clemens Kool & Henri�tte Prast, 2005. "Risk-return preferences in the pension domain: are people able to choose?," DNB Working Papers 025, Netherlands Central Bank, Research Department.
  5. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  6. Pierre-André Chiappori & Monica Paiella, 2008. "Relative Risk Aversion Is Constant: Evidence from Panel Data," Discussion Papers 5_2008, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
  7. Andrew A. Samwick & Jonathan Skinner, 2004. "How Will 401(k) Pension Plans Affect Retirement Income?," American Economic Review, American Economic Association, vol. 94(1), pages 329-343, March.
  8. Benartzi, Shlomo & Thaler, Richard H, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 73-92, February.
  9. Deborah Lucas, 2007. "Valuing & Hedging: Defined Benefit Pension Obligations - The Role of Stocks Revisited," Money Macro and Finance (MMF) Research Group Conference 2006 169, Money Macro and Finance Research Group.
  10. Dalal, Ardeshir J & Arshanapalli, Bala G, 1993. " Estimating the Demand for Risky Assets via the Indirect Expected Utility Function," Journal of Risk and Uncertainty, Springer, vol. 6(3), pages 277-88, June.
  11. Zvi Bodie & Alan J. Marcus & Robert C. Merton, 1988. "Defined Benefit versus Defined Contribution Pension Plans: What are the Real Trade-offs?," NBER Chapters, in: Pensions in the U.S. Economy, pages 139-162 National Bureau of Economic Research, Inc.
  12. Cui, Jiajia & Jong, Frank De & Ponds, Eduard, 2011. "Intergenerational risk sharing within funded pension schemes," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(01), pages 1-29, January.
  13. A.H. Siegmann, 2003. "Optimal Investment Policies for Defined Benefit Pension Funds," WO Research Memoranda (discontinued) 728, Netherlands Central Bank, Research Department.
  14. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
  15. Boender, Guus C. E., 1997. "A hybrid simulation/optimisation scenario model for asset/liability management," European Journal of Operational Research, Elsevier, vol. 99(1), pages 126-135, May.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cup:jpenef:v:10:y:2011:i:03:p:417-434_00. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Keith Waters)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.