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Valuing Pensions (Annuities) with Different Types of Inflation Protection in Total Compensation Comparisons

  • James E. Pesando

Pensions provided in the public sector are often indexed, while pensions in the private sector typically are not. To conduct the total compensation comparisons that ostensibly guide government pay policy, one must value annuities which differ in their degree of inflation protection. This paper conducts this exercise from the viewpoint of modem finance theory, and contrasts the results with those of a representative government, the Government of Canada. The results suggest that governments may typically understate the value of indexed pensions and overstate the value of pensions which receive incomplete inflation protection. A contributing factor is the apparent belief that standardizing actuarial assumptions is sufficient to ensure comparability, in spite of the fact that risk is ignored and that interest rate and inflation assumptions are typically not those of the market.

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File URL: http://www.nber.org/papers/w0956.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0956.

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Date of creation: Aug 1982
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Publication status: published as Pesando, James E. "Valuing Pensions (Annuities) with Different Types of Inflation Protection in Total Compenstation Comparisons." Canadian Journal of Economics, Vol. XVII, No.3, (August 1984), pp. 569-587.
Handle: RePEc:nbr:nberwo:0956
Note: PE
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  1. Bodie, Zvi, 1976. "Common Stocks as a Hedge against Inflation," Journal of Finance, American Finance Association, vol. 31(2), pages 459-70, May.
  2. Pesando, James E, 1984. "Employee Evaluation of Pension Claims and the Impact of Indexing Initiatives," Economic Inquiry, Western Economic Association International, vol. 22(1), pages 1-17, January.
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