A Traffic Light Approach to Solvency Measurement of Swiss Occupational Pension Funds

Alexander Braun, Przemysław Rymaszewski and Hato Schmeiser
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Alexander Braun: Institute of Insurance Economics, University of St. Gallen, Kirchlistrasse 2, CH-9010, St. Gallen, Switzerland. E-mails: alexander.braun@unisg.ch, przemyslaw.rymaszewski@unisg.ch, hato.schmeiser@unisg.ch
Przemysław Rymaszewski: Institute of Insurance Economics, University of St. Gallen, Kirchlistrasse 2, CH-9010, St. Gallen, Switzerland. E-mails: alexander.braun@unisg.ch, przemyslaw.rymaszewski@unisg.ch, hato.schmeiser@unisg.ch
Hato Schmeiser: Institute of Insurance Economics, University of St. Gallen, Kirchlistrasse 2, CH-9010, St. Gallen, Switzerland. E-mails: alexander.braun@unisg.ch, przemyslaw.rymaszewski@unisg.ch, hato.schmeiser@unisg.ch

The Geneva Papers on Risk and Insurance - Issues and Practice, 2011, vol. 36, issue 2, 254-282

Abstract: In this paper, we combine a stochastic pension fund model with a traffic light approach to solvency measurement of occupational pension funds in Switzerland. Assuming normally distributed asset returns, a closed-form solution can be derived. Despite its simplicity, we believe the model comprises the essential risk sources needed in supervisory practice. Owing to its ease of calibration, it is well suited for a regulatory application in the fragmented Swiss market, keeping costs of solvency testing at a minimum. We calibrate and implement the model for a small sample of ten Swiss pension funds in order to illustrate its application and the derivation of traffic light signals. In addition, a sensitivity analysis is conducted to identify important drivers of the shortfall probabilities for the traffic light conditions. Although our analysis concentrates solely on Switzerland, the approach could also be applied to similar pension systems.

Date: 2011
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