Intergenerational value transfers within an industry-wide pension fund —a value-based ALM analysis

Intergenerational solidarity is an important topic in the increasing interest in collective pension schemes. How great is this solidarity? Is there a balanced sharing of costs and benefits across age cohorts? The long-term sustainability of any pension scheme stands or falls by the willingness of members to continue to participate; the attitude of younger persons is crucial in this regard. In this chapter we set out a method by which we can illustrate the way in which the value transfer between generations within an industry-wide pension fund occurs. This method - which we term value-based generational accounting - is ideally suited to investigating how far current policy itself, and changes to that policy, result in a balanced sharing of costs, benefits and risks across the generations participating in the pension fund. The method thereby also forms a good basis for justifying (in advance and in retrospect) the policy that is pursued. We begin the chapter by explaining the method of value-based generational accounting. We deduce from this that a pension fund can be characterised as a 'zero-sum game'. A change in policy does not create extra value, but does result in a redistribution of value between the parties involved in the pension fund. We then examine the generational effects for a standard industry-wide pension fund the pension fund policy regarding investments, contribution rate setting and indexation policy. We pay no attention on transfers between members as a consequence of the operation of the uniform contribution rate. We regard this practice as a given. The contribution by Boeijen et al. in this book deals specifically with the pay-as-you-go element from younger to older employees, making use of the technique explained in that chapter. In addition, value transfers can also occur within a cohort. This topic is the focus of the contribution of Aarssen and Kuipers in this book. It is our view that the proposed method is a valuable addition in the evaluation of current policy and policy variations. The approach of value-based generational accounting should therefore form a part of the decision process regarding the financing policy of the fund. This can prevent undesirable and/or unintended value transfers between generations. The proposed method can assist in searching for a set of policy parameters whereby transfers do not take place, or if they do, they are of acceptable size.