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Utility-equivalence of pension security mechanisms

Author

Listed:
  • Dirk Broeders
  • An Chen
  • Birgit Koos

Abstract

Adequate funding of occupational pension plans is key to benefit security. Across countries different methods of securing funding exist: solvency requirements, a pension guarantee fund, and sponsor support. The key goal of this paper is to investigate the welfare implications to the beneficiary in a hybrid pension scheme. We show that the three security mechanisms can be made utility-equivalent by adjusting the pension contract specifications. The utility-equivalence approach could serve to strengthen the \holistic balance sheet" approach as advised by EIOPA. It enables regulators to compare various pension systems across Europe in a single framework from a utility perspective instead of a valuation perspective.

Suggested Citation

  • Dirk Broeders & An Chen & Birgit Koos, 2014. "Utility-equivalence of pension security mechanisms," DNB Working Papers 414, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:414
    as

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    File URL: https://www.dnb.nl/en/binaries/Working%20Paper%20414_tcm47-302773.pdf
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    References listed on IDEAS

    as
    1. Dirk Broeders & An Chen & David Rijsbergen, 2013. "Valuation of liabilities in hybrid pension plans," Applied Financial Economics, Taylor & Francis Journals, pages 1215-1229.
    2. Beijnen, Christine & Bolt, Wilko, 2009. "Size matters: Economies of scale in European payments processing," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 203-210, February.
    3. Pesaran, M. Hashem & Pick, Andreas & Pranovich, Mikhail, 2013. "Optimal forecasts in the presence of structural breaks," Journal of Econometrics, Elsevier, pages 134-152.
    4. Alessandro Riboni & Francisco J. Ruge-Murcia, 2008. "Preference Heterogeneity in Monetary Policy Committees," International Journal of Central Banking, International Journal of Central Banking, vol. 4(1), pages 213-233, March.
    5. Jacob A. Bikker & Dirk W.G.A. Broeders & Dirk Jan de Dreu, 2010. "Stock Market Performance and Pension Fund Investment Policy: Rebalancing, Free Float, or Market Timing?," International Journal of Central Banking, International Journal of Central Banking, vol. 6(2), pages 53-79, June.
    6. Alexander Kling & Andreas Richter & Jochen Ruß, 2007. "The Impact of Surplus Distribution on the Risk Exposure of With Profit Life Insurance Policies Including Interest Rate Guarantees," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 74(3), pages 571-589.
    7. Robert C. Merton & Zvi Bodie, 1992. "On the Management of Financial Guarantees," Financial Management, Financial Management Association, vol. 21(4), Winter.
    8. Dirk Broeders & An Chen, 2013. "Pension Benefit Security: A Comparison of Solvency Requirements, a Pension Guarantee Fund, and Sponsor Support," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(2), pages 239-272, June.
    9. Chen, An, 2011. "A risk-based model for the valuation of pension insurance," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 401-409.
    10. H rdle, Wolfgang & Huet, Sylvie & Mammen, Enno & Sperlich, Stefan, 2004. "Bootstrap Inference In Semiparametric Generalized Additive Models," Econometric Theory, Cambridge University Press, pages 265-300.
    11. Laura Ballotta & Steven Haberman & Nan Wang, 2006. "Guarantees in With-Profit and Unitized With-Profit Life Insurance Contracts: Fair Valuation Problem in Presence of the Default Option," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(1), pages 97-121.
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    More about this item

    Keywords

    Pension plans; pension regulation; guarantee systems; power utility; certainty equivalents;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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