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Structure of intergenerational risk-sharing plans: optimality and fairness

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  • Xiaobai Zhu
  • Mary Hardy
  • David Saunders

Abstract

In this paper, we derive optimal designs for a stylized Intergenerational Risk Sharing (IRS) pension plan. We study a Defined Ambition plan under which both contributions and pension benefits are adjusted based on the funding level. Our objective function focuses on the stability of members' lifetime consumption, both in the contribution and benefit phases, formulating the optimization as an ergodic control problem. We illustrate the drawbacks of unconstrained optimization and demonstrate the importance of including regulatory requirements for the sake of fairness across generations. Our results show that a linear risk sharing protocol is transparent, and with reasonable constraints on the funding level, can deliver a risk sharing plan that is fair with respect to intergenerational risk transfers, and is sustainable.

Suggested Citation

  • Xiaobai Zhu & Mary Hardy & David Saunders, 2021. "Structure of intergenerational risk-sharing plans: optimality and fairness," Scandinavian Actuarial Journal, Taylor & Francis Journals, vol. 2021(7), pages 543-571, August.
    • Handle: RePEc:taf:sactxx:v:2021:y:2021:i:7:p:543-571
    DOI: 10.1080/03461238.2020.1862291
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