The Occurrence and Impact of Pension Fund Discontinuity
38 Pages Posted: 10 May 2017
Date Written: May 5, 2017
Collective pension arrangements tend to yield higher risk-adjusted pension benefits than individual plans due to intergenerational risk sharing and the lack of annuity conversion risk. These benefits pose the implicit assumption that the pension fund has an infinite horizon, while we observe that many pension funds discontinue. Using case studies of six discontinued pension funds, in combination with a simulation model, this paper analyses the occurrence and impact of pension fund discontinuity. Although discontinuity tends to increase the volatility of pension benefits, median benefits in most institutional settings increase after discontinuing the fund. We find that both the occurrence and impact of discontinuity depends strongly on the institutional setting of the pension fund. Stricter regulations, such as more conservative discount rates, increase the financial stability of the pension fund; however, they may reduce membership support through lower replacement rates. This poses a trade-off in the design of the pension system.
Keywords: pension fund discontinuity
Suggested Citation: Suggested Citation