Stability of Participation in Collective Pension Schemes: An Option Pricing Approach

54 Pages Posted: 18 Sep 2015

See all articles by Damiaan Chen

Damiaan Chen

University of Amsterdam

Roel M. W. J. Beetsma

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); European Commission; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Tinbergen Institute; Netspar

Dirk Broeders

De Nederlandsche Bank; Maastricht University

Multiple version iconThere are 2 versions of this paper

Date Written: September 7, 2015

Abstract

This paper contributes to the discussion about mandatory participation in collective funded pension schemes. It explores under what circumstances individual participants exercise the option to exit such scheme if participation is voluntary. First, we show how the willingness to participate increases when there are more future exercise dates. Then, we show how the pension fund’s set of policy instruments can be designed to minimise the likelihood that cohorts exit the pension scheme. The instruments consist of contribution and indexation policies. Recovery of the funding ratio (ratio of assets over liabilities) to its regulatory target level may be based on uniform contributions or age-dependent contributions which are actuarially fair in expectation. Specifically, while the value of the exit-option deters younger workers from exiting the pension fund, a uniform contribution policy encourages older workers to stay in the pension scheme.

Keywords: Defined-benefit and collective defined-contribution pension funds, participation decision, actuarially fair, uniform and age-dependent contribution, European, Bermuda and American option, Least Squares Monte Carlo simulations, stability

JEL Classification: C61, G23, J32

Suggested Citation

Chen, Damiaan and Beetsma, Roel M. W. J. and Broeders, Dirk, Stability of Participation in Collective Pension Schemes: An Option Pricing Approach (September 7, 2015). Netspar Discussion Paper No. 09/2015-029, Available at SSRN: https://ssrn.com/abstract=2662011 or http://dx.doi.org/10.2139/ssrn.2662011

Damiaan Chen

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

Roel M. W. J. Beetsma (Contact Author)

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM) ( email )

P.O.Box 15867
Amsterdam
Netherlands
+31 20 525 5280 (Phone)

European Commission ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Dirk Broeders

De Nederlandsche Bank ( email )

P.O. Box 98
Amsterdam, 1000 AB
Netherlands

HOME PAGE: http://www.dnb.nl/en/research/personal-pages/dirk-broeders/

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

HOME PAGE: http://www.maastrichtuniversity.nl/about-um/faculties/school-business-and-economics

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
15
Abstract Views
443
PlumX Metrics