Conditional Indexation in Defined Benefit Pension Plans
In the Netherlands, the typical pension contract nowadays comprises an average earnings defined benefit pension in which only nominal benefits are guaranteed, but with the intention to provide wage indexation. In the new supervisory regime, the guaranteed pension rights, based on market valuation, are subject to risk-based solvency requirements. Provisioning is not required for conditional pension rights, though contributions have to be consistent with the indexation ambition, as communicated with the participants. This paper analyses to what extent indexation is indeed likely, given different indexation and contribution policies. Thereby, it explains how intergenerational risk sharing in defined benefit pension plans can provide a reasonable insurance of pension benefits against wage or price inflation. Moreover, it illustrates the tenability of defined benefit pension plans under ageing, the new fair-value accounting regimes, and possible volatility on financial markets. The analysis is based on a stochastic Pension Asset and Liability Model for the Netherlands (PALMNET). According to the PALMNET simulations, voluntary provisioning for indexation is to be recommended. Without reserving, indexation cuts may be severe and the solvency requirements incidentally lead to extreme premiums. Fully guaranteed indexation is virtually unaffordable under the new supervisory regime, because the real discount rate is generally both very low and volatile.
|Date of creation:||Feb 2006|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.dnb.nl/en/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Peter Vlaar, 2005. "Defined Benefit Pension Plans and Regulation," DNB Working Papers 063, Netherlands Central Bank, Research Department.
- Christian E. Weller, 2004. "The future of public pensions in the OECD," Cambridge Journal of Economics, Oxford University Press, vol. 28(4), pages 489-504, July.
- E. Philip Davis, 2004.
"Is there a Pensions Crisis in the U.K.?,"
The Geneva Papers on Risk and Insurance,
The International Association for the Study of Insurance Economics, vol. 29(3), pages 343-370, 07.
- E. Philip Davis, 2004. "Is there a Pensions Crisis in the U.K.?," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 29(3), pages 343-370, July.
- E Philip Davis, 2003. "Is There A Pensions Crisis In The Uk?," Public Policy Discussion Papers 03-21, Economics and Finance Section, School of Social Sciences, Brunel University.
- E Philip Davis, 2003. "Is There A Pensions Crisis In The Uk?," Economics and Finance Discussion Papers 03-21, Economics and Finance Section, School of Social Sciences, Brunel University.
- Davis, Philip E., 2003. "Is There a Pensions Crisis in the UK?," Discussion Paper 175, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
- Ponds, Eduard H. M., 2003. "Pension funds and value-based generational accounting," Journal of Pension Economics and Finance, Cambridge University Press, vol. 2(03), pages 295-325, November.
- Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, 02.
- Sharpe, William F., 1976. "Corporate pension funding policy," Journal of Financial Economics, Elsevier, vol. 3(3), pages 183-193, June.
- Blake, David, 2000. "Does It Matter What Type of Pension Scheme You Have?," Economic Journal, Royal Economic Society, vol. 110(461), pages F46-81, February.
- Lawrence H. Summers, 1983.
"Observations on the Indexation of Old Age Pensions,"
in: Financial Aspects of the United States Pension System, pages 231-258
National Bureau of Economic Research, Inc.
- Lawrence H. Summers, 1982. "Observations on the Indexation of Old Age Pensions," NBER Working Papers 1023, National Bureau of Economic Research, Inc.
- 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.
- Zvi Bodie & John B. Shoven, 1983. "Financial Aspects of the United States Pension System," NBER Books, National Bureau of Economic Research, Inc, number bodi83-1.
When requesting a correction, please mention this item's handle: RePEc:dnb:dnbwpp:086. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rob Vet)
If references are entirely missing, you can add them using this form.