Continuous Time Model for Notional Defined Contribution Pension Schemes: Liquidity and Solvency

37 Pages Posted: 17 Jul 2017 Last revised: 14 Oct 2019

See all articles by Jennifer Alonso-García

Jennifer Alonso-García

Université Libre de Bruxelles (ULB) - Department of Mathematics; ARC Centre of Excellence in Population Ageing Research; Netspar

Pierre Devolder

Catholic University of Louvain

Date Written: June 2, 2019

Abstract

Notional Defined Contribution (NDC) pension schemes are defined contribution plans which are pay-as-you-go financed. From a design viewpoint, the countries where NDCs have been implemented cannot guarantee sustainability due to the choice of notional return paid to the contributions and the indexation rate paid to pensions. We study how the scheme should be designed to achieve liquidity and solvency with a limited set of assumptions in a continuous overlapping generations model that increases traceability of the results. The adequacy and actuarial fairness are also jointly studied in the numerical example for the population of Belgium. We find that the proposed indexation and notional rate act as automatic balancing mechanisms that ensure sustainability and actuarial fairness. However, the effect on pension adequacy depends on the generosity of the annuity scheme at retirement.

Keywords: Automatic balancing mechanisms, liquidity, solvency, sustainability, fairness, pension, design

JEL Classification: E62, H55, J26

Suggested Citation

Alonso-García, Jennifer and Devolder, Pierre, Continuous Time Model for Notional Defined Contribution Pension Schemes: Liquidity and Solvency (June 2, 2019). Insurance: Mathematics and Economics, Vol. 88, No. September, 2019, Available at SSRN: https://ssrn.com/abstract=3000778 or http://dx.doi.org/10.2139/ssrn.3000778

Jennifer Alonso-García (Contact Author)

Université Libre de Bruxelles (ULB) - Department of Mathematics ( email )

Brussels
Belgium

ARC Centre of Excellence in Population Ageing Research ( email )

Level 6, Central Lobby (enter via East Lobby)
Australian School of Business Building
Sydney, New South Wales NSW 2052
Australia

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Pierre Devolder

Catholic University of Louvain ( email )

Place Montesquieu, 3
B-1348 Louvain-la-Neuve, 1348
Belgium

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
63
Abstract Views
490
rank
386,253
PlumX Metrics