What Drives Pension Indexation in Turbulent Times? An Empirical Examination of Dutch Pension Funds

Dirk Broeders, Paul Hilbers, David Rijsbergen and Ningli Shen

De Economist, 2014, vol. 162, issue 1, 70 pages

Abstract: This paper identifies the key factors influencing indexation decisions in turbulent economic times within defined benefit plans using a unique panel dataset of 166 Dutch pension funds from 2007 to 2010. Key drivers of indexation are the funding ratio, inflation and real wage growth. The type of pension fund and the interest rate exposure are also statistically significant, although the latter effect is nonlinear. The asset allocation has no significant effect on the level of provided indexation as this is already captured by the funding ratio. We also examine the relation between policy ladders and the actual level of provided indexation. This study finds that a policy ladder with an upper limit equal to a 100 % real funding ratio is able to predict the actual level of indexation more accurately than a ladder with an upper limit based on a pension fund’s required nominal funding ratio. The latter tends to overestimate the actual level of indexation. Copyright Springer Science+Business Media New York 2014

Keywords: Indexation; Policy ladders; Defined benefit pension plans; G12; G13; G23 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/s10645-014-9223-y

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