20 Pages Posted: 19 Nov 2009 Last revised: 30 Jan 2012
Date Written: February 12, 2009
New accounting rules and increased scarcity of risk capital have led to growing pressure on corporations to shift pension plan risk from employers to participants. This implies a shift from Defined Benefit (DB) plans to a variety of collective and individual Defined Contributions (DC) plans. Most of these shifts have been ad-hoc and not based on clear and objective criteria. This article shows how negotiations could be clarified by using modern option pricing and financing techniques. Both the value of the guarantees regarding accrued pension rights, as well as future rights to be accrued, can be objectively determined. For example, the authors show that a shift from a typical DB to a collective DC plan should cost the employer a lump sum payment of twelve percent of the accrued pension obligations and an increase in the contribution rate at four percent of pay.
Suggested Citation: Suggested Citation
Hoevenaars, Roy P. M. M. and Kocken, Theo P. and Ponds, Eduard H.M., Pricing Risk in Corporate Pension Plans: Understanding the Real Pension Deal (February 12, 2009). Netspar Discussion Paper No. 02/2009-009. Available at SSRN: https://ssrn.com/abstract=1508425 or http://dx.doi.org/10.2139/ssrn.1508425
By Andrew Biggs