Pension funds as institutions for intertemporal risk transfer

Roger T. Baumann and Heinz H. Müller

Insurance: Mathematics and Economics, 2008, vol. 42, issue 3, 1000-1012

Abstract: A continuous time overlapping generation model is used to analyse defined-contribution pension plans. Without intergenerational risk transfer between employees the optimal investment strategy results from the Merton model. Introducing intergenerational risk transfer leads to an increase in the risk tolerance of future employees and allows us to improve their anticipated expected utility resulting from accrued retirement benefits. Of course, this leads to a risk of temporary underfunding. But even for an underfunded pension plan one can guarantee that in the long run, the median of the funding ratio exceeds one.

Date: 2008
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