Valuation of Intergenerational Transfers in Funded Collective Pension Schemes

36 Pages Posted: 5 Nov 2006

See all articles by Roy P. M. M. Hoevenaars

Roy P. M. M. Hoevenaars

APG Asset Management

Eduard H.M. Ponds

Algemene Pensioen Groep (APG); Tilburg University - Department of Economics; Netspar; Tilburg University - Center for Economic Research (CentER)

Date Written: June 5, 2007

Abstract

This paper applies contingent claim analysis to value pension contracts for real-life collective pension plans with intergenerational risk sharing and offering DB-like benefits. We rewrite the balance sheet of such a pension und as an aggregate of embedded generational options. This implies that a pension fund is a zero-sum game in value terms, so any policy change inevitably leads to value transfers between generations. We explore intergenerational value transfers that may arise from a plan redesign or from changes in funding policy and risk sharing rules. We develop a stochastic framework which accounts for time-varying investment opportunities and computes the embedded generational options. Changes in the values of the generational options enable us to evaluate the impact of policy modifications in the pension contract with respect to intergenerational transfers and redistribution. We find that a switch to a less risky asset mix is beneficial to elderly members at the expense of younger members who lose value. A reallocation of risk bearing from a plan with flexible contributions and fixed benefits to a plan with fixed contributions and flexible benefits leads to value redistribution from older plan members to younger ones.

Keywords: Asset liability management, Generational accounting, Intergenerational risk sharing, funded defined-benefit,plans, hybrid plans, generational accounting, embedded options, value-based ALM, public finance, social security reform

JEL Classification: G13, G23, H55

Suggested Citation

Hoevenaars, Roy P. M. M. and Ponds, Eduard H.M., Valuation of Intergenerational Transfers in Funded Collective Pension Schemes (June 5, 2007). Available at SSRN: https://ssrn.com/abstract=942266 or http://dx.doi.org/10.2139/ssrn.942266

Roy P. M. M. Hoevenaars (Contact Author)

APG Asset Management ( email )

P.O. Box 75283
1070 AG
Amsterdam
Netherlands
+31206048313 (Phone)

Eduard H.M. Ponds

Algemene Pensioen Groep (APG) ( email )

P.O. Box 75283
Amsterdam, 1070 AG
Netherlands

Tilburg University - Department of Economics

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

Tilburg

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