The Occurrence and Impact of Pension Fund Discontinuity

38 Pages Posted: 10 May 2017

See all articles by Gosse Alserda

Gosse Alserda

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management (ERIM)

Onno W. Steenbeek

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); APG All Pensions Group

Fieke van der Lecq

Vrije Universiteit Amsterdam

Date Written: May 5, 2017

Abstract

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

Alserda, Gosse and Steenbeek, Onno W. and van der Lecq, Fieke, The Occurrence and Impact of Pension Fund Discontinuity (May 5, 2017). Available at SSRN: https://ssrn.com/abstract=2965344 or http://dx.doi.org/10.2139/ssrn.2965344

Gosse Alserda (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Onno W. Steenbeek

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

Dept. of Finance, H14-1
P.O. Box 1738
3000 DR Rotterdam, 3000DR
Netherlands
+31-10-4081400 (Phone)
+31-10-4089165 (Fax)

HOME PAGE: http://people.few.eur.nl/steenbeek/

APG All Pensions Group ( email )

Gustav Mahlerplein 3
P.O. Box 75283
1070 AG Amsterdam
Netherlands
+31-20-6049122 (Phone)
+31-20-4059176 (Fax)

HOME PAGE: http://www.apg.nl

Fieke Van der Lecq

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

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