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Pension funds and value-based generational accounting

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  • PONDS, EDUARD H. M.

Abstract

The raison d'être of wage-indexed defined benefit pension funds is to provide insurance against standard-of-living risk after retirement, based on intergenerational risk sharing. Pension funds necessarily have to accept mismatch risk in providing this kind of insurance. Mismatch risk taken by the pension fund is risk for the fund's stakeholders. We combine the value-based approach and the method of generational accounting to analyze the economic value of the stakes of the different generations and the issue of who gains and who loses (transfers of value between generations) from alternative funding and indexation policies. Rules concerning the allocation of a funding surplus or funding shortage in particular are decisive to the direction and to the size of transfers of value between stakeholders. We put forward two criteria to evaluate alternative policies employed by pension funds: the funding policy and allocation rules must give an ex ante fair compensation for risk taken by generations and the sustainability of a pension plan must be checked with respect to ex post redistributive effects for current and future generations. Value-based generational accounting provides a tool for testing a pension fund policy for these two criteria.

Suggested Citation

  • Ponds, Eduard H. M., 2003. "Pension funds and value-based generational accounting," Journal of Pension Economics and Finance, Cambridge University Press, vol. 2(3), pages 295-325, November.
    • Handle: RePEc:cup:jpenef:v:2:y:2003:i:03:p:295-325_00
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    Cited by:

    1. Servaas Bilsen & Roel J. Mehlkopf & Stephan Stalborch, 2022. "Intergenerational Transfers in the New Dutch Pension Contract," De Economist, Springer, vol. 170(1), pages 37-67, February.
    2. Nick Draper & Casper Ewijk & Marcel Lever & Roel Mehlkopf, 2014. "Stochastic Generational Accounting Applied to Reforms of Dutch Occupational Pensions," De Economist, Springer, vol. 162(3), pages 287-307, September.
    3. Dirk Broeders, 2006. "Valuation of Conditional Pension Liabilities and Guarantees under Sponsor Vulnerabilities," DNB Working Papers 082, Netherlands Central Bank, Research Department.
    4. Dirk Broeders, 2010. "Valuation of Contingent Pension Liabilities and Guarantees Under Sponsor Default Risk," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(4), pages 911-934, December.
    5. Hari, N., 2007. "Modeling mortality : Empirical studies on the effect of mortality on annuity markets," Other publications TiSEM a31eb479-4ce0-404a-b5c8-f, Tilburg University, School of Economics and Management.
    6. Bégin, Jean-François, 2020. "Levelling the playing field: A VIX-linked structure for funded pension schemes," Insurance: Mathematics and Economics, Elsevier, vol. 94(C), pages 58-78.
    7. Jacob A. Bikker & Peter J.G. Vlaar, 2006. "Conditional Indexation in Defined Benefit Pension Plans," DNB Working Papers 086, Netherlands Central Bank, Research Department.
    8. Noël Bonneuil, 2013. "Early Warning to Insolvency in the Pension Fund: The French Case," Risks, MDPI, vol. 1(1), pages 1-13, January.
    9. Emmanouil Platanakis & Charles Sutcliffe, 2017. "Pension Schemes, Taxation and Stakeholder Wealth: The USS Rule Changes," ICMA Centre Discussion Papers in Finance icma-dp2017-08, Henley Business School, University of Reading.
    10. Platanakis, Emmanouil & Sutcliffe, Charles, 2016. "Pension scheme redesign and wealth redistribution between the members and sponsor: The USS rule change in October 2011," Insurance: Mathematics and Economics, Elsevier, vol. 69(C), pages 14-28.
    11. Hoevenaars, Roy P.M.M. & Ponds, Eduard H.M., 2008. "Valuation of intergenerational transfers in funded collective pension schemes," Insurance: Mathematics and Economics, Elsevier, vol. 42(2), pages 578-593, April.
    12. Alserda, G.A.G. & Steenbeek, O.W. & van der Lecq, S.G., 2017. "The Occurrence and Impact of Pension Fund Discontinuity," ERIM Report Series Research in Management ERS-2017-008-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    13. Lekniute, Z. & Beetsma, R.M.W.J. & Ponds, E.H.M., 2014. "A Value-Based Approach to the Redesign of US State Pension Plans," Other publications TiSEM 3156027d-33c6-4045-963a-d, Tilburg University, School of Economics and Management.
    14. Hoevenaars, J. & Ponds, E.H.M., 2008. "Valuation of intergenerational transfers in collective funded pension schemes," Other publications TiSEM 2c1afa01-df29-490e-bc52-8, Tilburg University, School of Economics and Management.

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