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Pension benefit security: a comparison of solvency requirements, a pension guarantee fund and sponsor support

Dirk Broeders and An Chen ()

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: Developed countries apply different security mechanisms in regulation to protect defined pension benefits: solvency requirements, a pension guarantee fund, and sponsor support. We test the performance of these mechanisms in terms of the protection offered to pension benefits in relation to the costs. For this, we calculate the expected log-return for the beneficiaries and the shortfall probability, i.e. the likelihood of the pension payment falling below the promised level. We show that it is possible to compare different pension security mechanisms using appropriate finance tools. Compared to a system based on solvency requirements alone, support by a pension guarantee fund or by the sponsor offers better downside protection for pension funds pursuing an aggressive investment policy. However, this comes at an additional cost. Beneficiaries of pension funds with conservative investment policies are better off under solvency requirements.

Keywords: Pension plans; regulation; barrier options; rainbow barrier options; guarantee systems (search for similar items in EconPapers)
JEL-codes: G11 G23 (search for similar items in EconPapers)
Date: 2010-12
New Economics Papers: this item is included in nep-age
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Related works:
Journal Article: Pension Benefit Security: A Comparison of Solvency Requirements, a Pension Guarantee Fund, and Sponsor Support (2013) Downloads
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