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Defined Benefit Pension Plans and Regulation

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  • Peter Vlaar

Abstract

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.

Suggested Citation

  • Peter Vlaar, 2005. "Defined Benefit Pension Plans and Regulation," DNB Working Papers 063, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:063
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    File URL: https://www.dnb.nl/binaries/Working%20Paper%2063_tcm46-146720.pdf
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    References listed on IDEAS

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    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.
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    5. Siegmann, Arjen, 2007. "Optimal investment policies for defined benefit pension funds," Journal of Pension Economics and Finance, Cambridge University Press, vol. 6(01), pages 1-20, March.
    6. Campbell, John Y & Viceira, Luis M, 2005. "The Term Structure of the Risk-Return Tradeoff," CEPR Discussion Papers 4914, C.E.P.R. Discussion Papers.
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    9. Josa-Fombellida, Ricardo & Rincon-Zapatero, Juan Pablo, 2001. "Minimization of risks in pension funding by means of contributions and portfolio selection," Insurance: Mathematics and Economics, Elsevier, vol. 29(1), pages 35-45, August.
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    Cited by:

    1. 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.
    2. Jacob A. Bikker & Peter J.G. Vlaar, 2006. "Conditional Indexation in Defined Benefit Pension Plans," DNB Working Papers 086, Netherlands Central Bank, Research Department.

    More about this item

    Keywords

    pension valuation; equity investment; optimal duration. J.E.L. Code: C15; G11; G23; G28;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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