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Defined Benefit Pension Plans and Regulation

  • Peter Vlaar

In this paper, it is investigated to what extent optimal investment policy by Dutch pension funds is affected by changes in regulation. It turns out that a complete market valuation method increases the cost of the defined benefit pension relative to a fixed discount rate method, as high pension premiums are to be payed exactly when expected future returns are the lowest. In practice, this timing problem does not seem to be severe for Dutch pension funds as solvency requirements are only applied to guaranteed pension rights, whereas a major part of pension benefits (indexation) is conditional. Moreover, a fixed interest rate may still be used to calculate pension premiums. Regarding the asset mix, the optimal duration of bonds in portfolio seems higher than currently observed, both under market valuation and under a fixed discount rate method. The new regulatory rules only slightly reduce the attractiveness of equity investment.

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 063.

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Date of creation: Dec 2005
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Handle: RePEc:dnb:dnbwpp:063
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Web page: http://www.dnb.nl/en/

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  1. Haberman, Steven & Sung, Joo-Ho, 2005. "Optimal pension funding dynamics over infinite control horizon when stochastic rates of return are stationary," Insurance: Mathematics and Economics, Elsevier, vol. 36(1), pages 103-116, February.
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  10. Arjen Siegmann, 2003. "Optimal Investment Policies for Defined Benefit Pension Funds," DNB Staff Reports (discontinued) 112, Netherlands Central Bank.
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  13. 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.
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