The Financial Theory of Defined Benefit Pension Schemes

1997 ◽  
Vol 3 (4) ◽  
pp. 835-966 ◽  
Author(s):  
C.J. Exley ◽  
S.J.B. Mehta ◽  
A.D. Smith
Keyword(s):  
Market Valuation ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Investment Management ◽  
Playing Field ◽  
Critical Areas ◽  
Pension Schemes ◽  
Modern Business ◽  
Corporate Pension ◽  
Management Techniques

ABSTRACTIncreasingly, modern business and investment management techniques are founded on approaches to measurement of profit and risk developed by financial economists. This paper begins by analysing corporate pension provision from the perspective of such financial theory. The results of this analysis are then reconciled with the sometimes contradictory messages from traditional actuarial valuation approaches and the alternative market-based valuation paradigm is introduced. The paper then proposes a successful blueprint for this mark-to-market valuation discipline and considers whether and how it can be applied to pension schemes both in theory and in practice. It is asserted that adoption of this market based approach appears now to be essential in many of the most critical areas of actuarial advice in the field of defined benefit corporate pension provision and that the principles can in addition be used to establish more efficient and transparent methodologies in areas which have traditionally relied on subjective or arbitrary methods. We extend the hope that the insights gained from financial theory can be used to level the playing field between defined benefit and defined contribution arrangements from both corporate and member perspectives.

scholarly journals Stochastic Actuarial Modelling of a Defined-Benefit Social Security Pension Scheme: An Analytical Approach

2008 ◽  
Vol 3 (1-2) ◽  
pp. 127-185 ◽  
Author(s):  
Subramaniam Iyer
Keyword(s):  
Social Security ◽  
Social Insurance ◽  
Stochastic Methods ◽  
Pension Scheme ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Stochastic Variation ◽  
Simplified Approach ◽  
Pension Schemes ◽  
Social Security Reforms

ABSTRACTAmong the systems in place in different countries for the protection of the population against the long-term contingencies of old-age (or retirement), disability and death (or survivorship), defined-benefit social security pension schemes, i.e. social insurance pension schemes, by far predominate, despite the recent trend towards defined-contribution arrangements in social security reforms. Actuarial valuations of these schemes, unlike other branches of insurance, continue to be carried out almost exclusively on traditional, deterministic lines. Stochastic applications in this area, which have been restricted mainly to occasional special studies, have relied on the simulation technique. This paper develops an analytical model for the stochastic actuarial valuation of a social insurance pension scheme. Formulae are developed for the expected values, variances and covariances of and among the benefit expenditure and salary bill projections and their discounted values, allowing for stochastic variation in three key input factors, i.e., mortality, new entrant intake, and interest (net of salary escalation). Each deterministic output of the valuation is thus supplemented with a confidence interval, that is, a range with an attached probability. The treatment covers the premiums under the different possible financial systems for these schemes, which differ from the funding methods of private pensions, as well as the testing of the level of the Fund ratio when the future contributions schedule is pre-determined. Although it is based on a relatively simplified approach and refers only to retirement pensions, with full adjustment in line with salary escalation, the paper brings out the stochastic features of pension scheme projections and illustrates a comprehensive stochastic valuation. It is hoped that the paper will stimulate interest in further research, both of a theoretical and a practical nature, and lead to progressively increasing recourse to stochastic methods in social insurance pension scheme valuations.

scholarly journals Sustaining the unsustainable? The political sustainability of pensions in Finland and the Netherlands

2021 ◽  
pp. 095892872110356
Author(s):  
Ville-Pekka Sorsa ◽  
Natascha van der Zwan
Keyword(s):  
The Netherlands ◽  
Pension Scheme ◽  
The Political ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Power Resources ◽  
Pension Schemes ◽  
Political Sustainability ◽  
Sustainability Challenges ◽  
Parametric Adjustment

What makes a pension scheme sustainable? Most answers to this question have revolved around expert assessments of pension schemes’ affordability or adequacy. This study shifts focus from the financial or social sustainability of pension scheme designs to their political sustainability. Political sustainability refers to policymakers’ ability and willingness to sustain pension schemes in the face of perceived challenges. We seek to fill a key research gap concerning the political sustainability of pensions by highlighting the processes of parametric adjustment through which pension schemes are sustained. We show how capital, labour and state actors have been able to actively sustain collective defined benefit (DB) pension schemes in two coordinated market economies, Finland and the Netherlands. The two countries have managed to sustain their DB pensions for relatively long periods of time despite facing the same sustainability challenges that have motivated paradigmatic shifts in other pension systems. We find that sustaining has been successful thanks to a governance culture in which policymakers have been willing to keep all pension scheme parameters open for negotiation and an institutional context that made policymakers able to turn parametric pension reforms into power resources for further reforms. Our findings also explain recent changes in the Netherlands, which moved the Dutch system towards collective defined contribution pensions.

scholarly journals Pension fund finance and sponsoring companies

2012 ◽  
Vol 11 (3) ◽  
pp. 439-463 ◽  
Author(s):  
E. PHILIP DAVIS ◽  
LEO DE HAAN
Keyword(s):  
Capital Market ◽  
Small Firms ◽  
Pension Fund ◽  
Pension Funds ◽  
Portfolio Allocation ◽  
Special Focus ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Capital Market Imperfections ◽  
Corporate Pension

AbstractWe present empirical evidence on the funding and portfolio allocation of around 200 Dutch corporate pension funds over the period 1996-2005, with a special focus on the influence of the sponsoring firm. We find that unprofitable and small firms contribute less to their pension funds than profitable and large firms, consistent with theories of capital market imperfections. Sponsor contributions are found to be positively correlated with leverage, suggesting that tax effects play a role. Defined benefit funds invest relatively more in equity and less in bonds than their defined contribution counterparts, which is in accordance with the risk shifting theory.

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