Fair Pensions

46 Pages Posted: 19 Apr 2019

See all articles by Ilja Boelaars

Ilja Boelaars

University of Chicago

Dirk Broeders

De Nederlandsche Bank; Maastricht University

Date Written: April 11, 2019


This paper examines the allocation of market risk in a general class of collective pension arrangements: Collective Defined Contribution (CDC) schemes. In a CDC scheme participants collectively share funding risk through benefit level adjustments. There is a concern that, if not well designed, CDC schemes are unfair and will lead to an unintended redistribution of wealth between participants and, in particular, between generations. We define a pension scheme as fair if all participants receive an arbitrage-free return on the market risk they bear. The fact that the participants' claim on the CDC schemes' collective assets is expressed in terms of a stochastic future benefit, makes the arbitrage-free allocation of market risk non-trivial. It depends crucially on the specification of the discount rate process in combination with the benefit adjustment process. We show that fair CDC schemes may use a default-free market interest rate in combination with a specific horizon-dependent benefit adjustment process. Alternative discount rates are also permissible, but require additional correction terms in the benefit adjustment process.

Keywords: Pension, Retirement, Asset Pricing, Fair value, Intergenerational risk-sharing, Funded pension systems

JEL Classification: H55, G13, G23, J26, J32

Suggested Citation

Boelaars, Ilja and Broeders, Dirk, Fair Pensions (April 11, 2019). De Nederlandsche Bank Working Paper No. 630, Available at SSRN: https://ssrn.com/abstract=3374456 or http://dx.doi.org/10.2139/ssrn.3374456

Ilja Boelaars (Contact Author)

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Dirk Broeders

De Nederlandsche Bank ( email )

P.O. Box 98
Amsterdam, 1000 AB

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

Maastricht University ( email )

P.O. Box 616
Maastricht, Limburg 6200MD

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

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