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Market Valuation, Pension Fund Policy and Contribution Volatility

Author

Listed:
  • Maarten Rooij

    ()

  • Arjen Siegmann

    ()

  • Peter Vlaar

    ()

Abstract

Market valuation is becoming more and more popular, both in accounting and regulation, as well as in academic circles. For pension funds and their participants, the knowledge that market-valued pension liabilities can indeed be transferred to a third party, if necessary, is a great virtue. Using a simulation model, this paper demonstrates the implicit costs and benefits of using market valuation for a typical Dutch pension fund, which offers a guaranteed average pay nominal pension with conditional indexation. The impact turns out to be fairly small, if fixed discount rates are still used for conditional rights. However, if market valuation is used for both unconditional and conditional rights, contribution volatility increases significantly. A remedy is to increase the duration of assets considerably. It is not clear, though, whether this option is available for large pension funds given the limited supply of long-term bonds.
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Suggested Citation

  • Maarten Rooij & Arjen Siegmann & Peter Vlaar, 2008. "Market Valuation, Pension Fund Policy and Contribution Volatility," De Economist, Springer, vol. 156(1), pages 73-93, March.
  • Handle: RePEc:kap:decono:v:156:y:2008:i:1:p:73-93
    DOI: 10.1007/s10645-007-9083-9
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    File URL: http://hdl.handle.net/10.1007/s10645-007-9083-9
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    References listed on IDEAS

    as
    1. M.C.J. van Rooij & A.H. Siegmann & P.J.G. Vlaar, 2004. "Palmnet: A pension asset and liability model for the Netherlands," WO Research Memoranda (discontinued) 760, Netherlands Central Bank, Research Department.
    2. Peter Vlaar, 2005. "Defined Benefit Pension Plans and Regulation," DNB Working Papers 063, Netherlands Central Bank, Research Department.
    3. P.J.A. van Els & W.A. van den End & M.C.J. van Rooij, 2003. "Pensions and public opinion: a survey among Dutch households," MEB Series (discontinued) 2003-18, Netherlands Central Bank, Monetary and Economic Policy Department.
    4. van Rooij, Maarten C.J. & Kool, Clemens J.M. & Prast, Henriette M., 2007. "Risk-return preferences in the pension domain: Are people able to choose?," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 701-722, April.
    5. Peter Vlaar, 2007. "Term Structure Modeling for Pension Funds:What to do in Practice?," DNB Working Papers 123, Netherlands Central Bank, Research Department.
    6. Jacob A. Bikker & Peter J.G. Vlaar, 2006. "Conditional Indexation in Defined Benefit Pension Plans," DNB Working Papers 086, Netherlands Central Bank, Research Department.
    7. de Jong, Frank, 2008. "Pension fund investments and the valuation of liabilities under conditional indexation," Insurance: Mathematics and Economics, Elsevier, vol. 42(1), pages 1-13, February.
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    Cited by:

    1. Dirk Broeders & Paul Hilbers & David Rijsbergen & Ningli Shen, 2014. "What Drives Pension Indexation in Turbulent Times? An Empirical Examination of Dutch Pension Funds," De Economist, Springer, vol. 162(1), pages 41-70, March.

    More about this item

    Keywords

    asset and liability management; conditional indexation; defined benefit pension funds; fair value versus actuarial discounting; Monte Carlo simulation; pension liabilities; G23; C15; C59; J18;

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C59 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Other
    • J18 - Labor and Demographic Economics - - Demographic Economics - - - Public Policy

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