Pension Fund Governance: The Intergenerational Conflict Over Risk and Contributions

23 Pages Posted: 30 Nov 2010 Last revised: 21 Feb 2011

See all articles by David Hollanders

David Hollanders

Tilburg University - Tilburg University School of Economics and Management

Mario R.C. Bersem

Copenhagen Business School

Date Written: October 1, 2010

Abstract

Many pension funds have a mismatch between assets and liabilities, taking more risks than securing liabilities implies. This puts fixed claims of retirees at risk. For the cases with and without macro-risk, this paper analyses the implications of this asset-liability mismatch for welfare, contribution policy and pension fund governance. The first result is that borrowing against human capital can be optimal if young workers are borrowing constrained. However, then contributions need be raised in case of underfunding. This implies that the ex ante risk level cannot be separated from the contribution policy expost. An optimal governance structure addresses this; otherwise a risk immunization policy -with the pension fund taking less risk- is second-best. In the presence of macro-risk it is not optimal to avoid losses for retirees. Optimal intergenerational risk sharing then implies retirees bear risks. The price and allocation of risk are determined endogenously with the result that losses are shared by higher contributions and lower pensions. This case applies in particular to large and nation-wide funds in a closed economies where the working participants coincide with tax-payers who underwrite "riskfree" government bonds.

Keywords: pension fund governance, leverage, macro risk

JEL Classification: D74, G11, G23, G32

Suggested Citation

Hollanders, David and Bersem, Mario R.C., Pension Fund Governance: The Intergenerational Conflict Over Risk and Contributions (October 1, 2010). Netspar Discussion Paper No. 10/2010-063. Available at SSRN: https://ssrn.com/abstract=1716782 or http://dx.doi.org/10.2139/ssrn.1716782

David Hollanders (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Mario R.C. Bersem

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

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