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 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.

Minimum funding ratios for defined-benefit pension funds

2010 ◽  
Vol 10 (3) ◽  
pp. 417-434 ◽  
Author(s):  
ARJEN SIEGMANN
Keyword(s):  
Risk Aversion ◽  
Expected Utility ◽  
Pension Fund ◽  
Equity Premium ◽  
Pension Scheme ◽  
Defined Benefit ◽  
Intergenerational Solidarity ◽  
Defined Contribution ◽  
Power Utility ◽  
Time Diversification

AbstractWe compute minimum nominal funding ratios for defined-benefit (DB) plans based on the expected utility that can be achieved in a defined-contribution (DC) pension scheme. Using Monte Carlo simulation, expected utility is computed for three different specifications of utility: power utility, mean-shortfall, and mean-downside deviation. Depending on risk aversion and the level of sophistication assumed for the DC scheme, minimum acceptable funding ratios are between 0.87 and 1.20 in nominal terms. For relative risk aversion of 5 and a DC scheme with a fixed-contribution setup, the minimum nominal funding ratio is between 0.87 and 0.98. The attractiveness of the DB plan increases with the expected equity premium and the fraction invested in stocks. We conclude that the expected value of intergenerational solidarity, providing time-diversification to its participants, can be large. Minimum funding ratios in real (inflation-adjusted) terms lie between 0.56 and 0.79. Given a DB pension fund with a funding ratio of 1.30, a participant in a DC plan has to pay a 2.7 to 6.1% point higher contribution on average to achieve equal expected utility.

scholarly journals The transition to NDC in Italy: assessing distributive and financial effects

2021 ◽  
pp. 1-16
Author(s):  
Carlo Mazzaferro
Keyword(s):  
Net Present Value ◽  
Pension System ◽  
Pension Scheme ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Ratio Distribution ◽  
Actuarial Fairness ◽  
Notional Defined Contribution ◽  
High Level ◽  
Pension Benefits

Abstract Moving from a Defined Benefit (DB) to a Notional Defined Contribution (NDC) pension formula creates significant re-distributive effects. We estimate the amount and the intensity of these effects in the case of the Italian transition to NDC, which began in 1995. Based on administrative data of the main Italian pension scheme (FPLD), we study the evolution of yearly inequality within old-age pension benefits. Furthermore, we study the adequacy and the actuarial fairness of the pension system, by estimating the replacement rates and the Net Present Value Ratio distribution for workers who retired in the period 1996–2019. Our results show that the very generous interpretation of acquired rights determined by the 1995 reform has contributed to maintaining a high level of adequacy and a significant level of intergenerational imbalance. The financial costs of this imbalance are estimated and its extent is significant.

Objectives and methods of funding defined benefit pension schemes

1987 ◽  
Vol 114 (2) ◽  
pp. 155-225 ◽  
Author(s):  
D. J. D. McLeish ◽  
C. M. Stewart
Keyword(s):  
The State ◽  
Pension Scheme ◽  
Occupational Pension ◽  
Defined Benefit ◽  
Pension Schemes ◽  
The Future ◽  
State Pension

The Objective of Funding1.1. As every actuarial student is taught:‘Pay-as-you-go is acceptable for a State pension scheme because the State is, for practical purposes, assured of a continuing existence.’However:‘The position is quite different in the case of an occupational scheme, since an employer's business may cease to exist.’1.2. It seems to us to follow, therefore, that the prime purpose of funding an occupational pension scheme must be to secure the accrued benefits, whatever they might be, in the event of the employer being unable or unwilling to continue to pay at some time in the future. To that end, the contributions would have to be sufficient both to pay the benefits as they fell due for as long as the scheme continued, and also to establish and maintain a fund which would be sufficient to secure the accrued benefits in the event of contributions ceasing and the scheme being discontinued, whenever that might occur.

scholarly journals Integrated risk management for defined benefit pension schemes: a practical guide

2017 ◽  
Vol 23 ◽  
Author(s):  
A. N. Hitchcox ◽  
C. Patel ◽  
C. J. Ramsey ◽  
E. L. Studd ◽  
L. T. Ma ◽  
...  
Keyword(s):  
Decision Making ◽  
Risk Management ◽  
Continuous Process ◽  
Working Party ◽  
Investment Strategy ◽  
Pension Scheme ◽  
Defined Benefit ◽  
Pension Schemes ◽  
Integrated Risk ◽  
Integrated Risk Management

AbstractThe Working Party has developed some practical hints and tips for those developing integrated risk management (IRM) plans for UK defined benefit pension schemes in the context of the requirements of the Pensions Regulator. Four case studies are presented to illustrate its conclusions, which are encapsulated in the ten commandments for effective IRM. IRM is the consideration of investment, funding and covenant issues, and how these interact. Its purpose should be to aid decision making and so should have a clear outcome in mind. It should be a continuous process and should form part of everyday trustee governance – it is not simply a one-off exercise. Whilst most Trustees and advisors consider funding issues when setting their investment strategy and vice versa, fewer fully integrate covenant into their decision-making process. However, covenant underpins all risk taken in a pension scheme and so needs to form a regular part of trustee discussions and analysis by advisors.

The Role and Responsibilities of Actuaries in the Defined Contribution Environment in the United Kingdom

1999 ◽  
Vol 5 (4) ◽  
pp. 763-800
Author(s):  
M.A. Stocker ◽  
S.D. Dudley ◽  
G.E. Finlay ◽  
H.J. Fisher ◽  
O. C. Harvey Wood ◽  
...  
Keyword(s):  
United Kingdom ◽  
Public Interest ◽  
Pension Scheme ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Current Role ◽  
Roles And Responsibilities ◽  
The Public ◽  
The United Kingdom ◽  
The Impact

ABSTRACTThis paper takes an overview of the potential roles and responsibilities of pension scheme actuaries in the United Kingdom in relation to defined contribution (DC) schemes.First it summarises briefly the background to UK retirement provision and in particular the move to DC arrangements. The paper then compares and contrasts the pension scheme actuary's current role in both defined benefit (DB) and DC schemes. This is then developed to consider what further statutory roles there may be for actuaries in DC schemes.The paper challenges the profession to champion the public interest by seeking clarity and simplification, and finally considers the impact on actuarial employment.

scholarly journals IMPACT OF DIFFERENT LIFE-CYCLE SAVING STRATEGIES AND UNEMPLOYMENT ON INDIVIDUAL SAVINGS IN DEFINED CONTRIBUTION PENSION SCHEME IN SLOVAKIA

2021 ◽  
Vol 24 (3) ◽  
pp. 128-148
Author(s):  
Michal Mešťan ◽  
Ivan Králik ◽  
Leoš Šafár ◽  
Ján Šebo
Keyword(s):  
Life Cycle ◽  
Low Risk ◽  
Pension Scheme ◽  
Defined Contribution ◽  
Replacement Rate ◽  
Pension Schemes ◽  
Unemployment Risk ◽  
Life Cycle Saving ◽  
The Impact ◽  
Optimal Saving

Searching for the optimal saving strategy is often tied with the life-cycle strategies where only the age of a saver is considered for setting the allocation profile between equities and bonds. Our article contributes to the debate by looking at the performance and adequacy risks arising from applying age-based saving strategies for savers in funded pension schemes. As many studies have proven the shift of the risk onto savers in defined contribution pension schemes under various saving strategies, we contribute to the debate by providing simulations of expected accumulated savings via funded pension scheme under the various life-cycle income profiles and existence of unemployment risk. Using the resampling simulation technique, we compare the fixed and age-based strategies of three different agents with various life-cycle income paths and different unemployment risk. We compare the expected amount of savings and calculate relative indicators comparing the expected monthly benefits, income replacement rate. We look closely on the impact of unemployment on the value of savings and calculate the unemployment factor explaining the value of savings lost due to the periods of unemployment. By combining life-cycle income functions of individuals with different education level and unemployment risk, we show that decisions of implementing low risk saving strategies are suboptimal and lead to a substantial decrease in replacement ratios not only for higher income cohorts but especially for the lowest ones. At the same time, we prove that employing low risk saving strategy leads to the increase of adequacy risk especially driven by the unemployment risk that is higher for lower education individuals. We conclude that age-based life-cycle saving strategies, where the remaining saving horizon is the only factor defining the allocation profile is not the optimal saving strategy and other factors should be considered as well when searching for optimal saving strategy.

Merging Schemes: An Economic Analysis of Defined Benefit Pension Scheme Merger Criteria

2006 ◽  
Vol 1 (2) ◽  
pp. 203-220 ◽  
Author(s):  
C. M. S. Sutcliffe
Keyword(s):  
Economic Analysis ◽  
Financial Markets ◽  
Balance Of Power ◽  
The State ◽  
Pension Scheme ◽  
Defined Benefit ◽  
Pension Schemes

ABSTRACTThe conditions under which pension schemes merge is an important issue which has been under-researched. Mergers can affect the strength of the sponsor's covenant and the balance of power between the trustees and the sponsor, as well as the deficit or the surplus of the receiving scheme and its funding ratio. This paper sets out two financial criteria to be met by any pension scheme merger: no profit or loss on merging with another scheme; and no dilution of the funding ratio. After defining a merger basis for valuing the assets and liabilities, and allowing for adjustments to the funding ratio via side receipts and payments; it is shown that, whether or not these criteria are met, depends on the state of the financial markets.

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.

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