Pricing Risk in Corporate Pension Plans: Understanding the Real Pension Deal

20 Pages Posted: 19 Nov 2009 Last revised: 30 Jan 2012

Roy P. M. M. Hoevenaars

APG Asset Management

Theo P. Kocken

Cardano Risk Management

Eduard H.M. Ponds

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

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Date Written: February 12, 2009

Abstract

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

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

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

APG Asset Management ( email )

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

Theo P. Kocken

Cardano Risk Management ( email )

Beurs World Trade Centre, 11th Floor
Beursplein 37
Rotterdam 3011 AA
Netherlands
+31-10-2434747 (Phone)
+31-10-4660907 (Fax)

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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