Optimal intergenerational risk sharing in a funded pension scheme context

  • Tim Willems
  • Published 2006

Abstract

Acknowledgements This bachelor thesis is not the result of my work alone. On the contrary: I am heavily indebted to several other people. In the first place I would like to thank my supervisors Lex Meijdam and Yvonne Adema for their cooperative attitude, extensive reading of earlier versions of this thesis and their very useful comments upon those. Secondly, I would like to thank my thesis group members Dennis, Teun, Theo and Thijs for their grateful comments. Finally, I would also like to thank Sweder van Wijnbergen (whom I assisted on several research projects recently) for some useful literature suggestions. Any remaining mistakes are fully my responsibility. Tilburg, may 2006 Tim Willems 6 7 Chapter 1 Prologue 1.1 Introduction As the Dutch population is ageing rapidly, as in most western countries, pension problems are on the top of the agenda. This ongoing debate has received even more attention due to the malaise on the stock markets at the beginning of the new millennium, with a deterioration of the financial situation of pension funds as a result. The average funding ratio of indexed liabilities fell from 125% ultimo 1999, to about 80% ultimo 2002 (Westerhout et. al, 2004: 21). Many pension funds were therefore forced to adjust their pension contracts: premiums were raised, benefits were lowered and pension funds ate into their reserves, all measures having different impacts on the generations involved. At this point it turned out that these pension contracts have a rather implicit character: it is anything but clear who carries what part of the financing risk. This rises the question what the optimal way would be for a pension fund to share these risks among different generations. In this thesis I am intending to answer this question from a societal point of view. I will evaluate the different possibilities of intergenerational risk sharing on the basis of a Rawlsian social welfare function. But first I will give a short introduction on the risks pension funds run on their portfolios, followed by a defense of

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Cite this paper

@inproceedings{Willems2006OptimalIR, title={Optimal intergenerational risk sharing in a funded pension scheme context}, author={Tim Willems}, year={2006} }