Pension Liability Measurement and Intergenerational Fairness: Two Case Studies

Abstract

This article shows how valuation techniques for pension liabilities in risk-sharing pension plans affect the distribution of wealth between generations. Some techniques in use today underestimate liabilities and benefit current retirees at the expense of other plan stakeholders, undermining the sustainability of risk-sharing pension plans by shifting concealed deficits to future generations. The liability valuation techniques of state and local pension plans in the United States and those recently proposed in the Netherlands for its Collective Defined Contribution pension system are two examples. The article shows that these techniques are not “arbitrage free,” meaning that their intergenerational wealth-distribution effects are deeply damaging.

Keywords: Arbitrage-Free Valuation, Collective Defined Contribution, Intergenerational Distribution, Liability Accounting, Pension Fund