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Palmnet: A pension asset and liability model for the Netherlands

Author

Listed:
  • M.C.J. van Rooij
  • A.H. Siegmann
  • P.J.G. Vlaar

Abstract

This study presents a pension model geared to the typical pension contract in the Netherlands. It is based on a defined benefit/average earnings pension system. Nominal benefits are guaranteed and indexation is intended. The model provides a framework for analysing adjustments to such factors as the asset mix, retirement age, returns and the method of discounting, premium setting and indexation. The importance of uncertainty over interest rate movements and returns on shares is made explicit by means of stochastic and historical simulations. In this, PALMNET differs from existing, often deterministic pension models. The main findings are, first, a wage -indexed defined benefit pension is still affordable despite the current shortfall of wealth of pension funds. Second, fair value accounting considerably increases the volatility of pension premiums. Third, reducing risks by adjusting the asset mix towards more bonds is costly in terms of average premiums, but reduces the volatility. These conclusions are based on realistic to conservative assumptions regarding returns and risks.

Suggested Citation

  • 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.
  • Handle: RePEc:dnb:wormem:760
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    File URL: https://www.dnb.nl/en/binaries/research%20memorandum%20wo%20no%20760EN_tcm47-146040.pdf
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    Citations

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    Cited by:

    1. van Rooij, Maarten C.J. & Kool, Clemens J.M. & Prast, Henriette M., 2007. "Risk-return preferences in the pension domain: Are people able to choose?," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 701-722, April.
    2. Streutker, Matthijs & van der Vlerk, Maarten & Klein Haneveld, Wim, 2007. "Implementation of new regulatory rules in a multistage ALM model for Dutch pension funds," Research Report 07005, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    3. Peter Vlaar, 2007. "Term Structure Modeling for Pension Funds:What to do in Practice?," DNB Working Papers 123, Netherlands Central Bank, Research Department.
    4. Peter Vlaar, 2005. "Defined Benefit Pension Plans and Regulation," DNB Working Papers 063, Netherlands Central Bank, Research Department.
    5. Allard Bruinshoofd & Sybille Grob, 2006. "Do changes in pension incentives affect retirement? A stated preferences approach to Dutch retirement consideration," DNB Working Papers 115, Netherlands Central Bank, Research Department.
    6. 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.
    7. 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

    Actuarial pension model; Monte Carlo simulation; historical simulation;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C59 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Other
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • J18 - Labor and Demographic Economics - - Demographic Economics - - - Public Policy

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