Managing Contribution and Capital Market Risk in a Funded Public Defined Benefit Plan: Impact of CVaR Cost Constraints

Raimond Maurer, Olivia Mitchell and Ralph Rogalla

No 14332, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Using a Monte Carlo framework, we analyze the risks and rewards of moving from an unfunded defined benefit pension system to a funded plan for German civil servants, allowing for alternative strategic contribution and investment patterns. In the process we integrate a Conditional Value at Risk (CVaR) restriction on overall plan costs into the pension manager's objective of controlling contribution rate volatility. After estimating the contribution rate that would fully fund future benefit promises for current and prospective employees, we identify the optimal contribution and investment strategy that minimizes contribution rate volatility while restricting worst-case plan costs. Finally, we analyze the time path of expected and worst-case contribution rates to assess the chances of reduced contribution rates for current and future generations. Our results show that moving toward a funded public pension system can be beneficial for both civil servants and taxpayers.

JEL-codes: G11 G15 G2 G23 H3 H55 H71 J26 J32 (search for similar items in EconPapers)
Date: 2008-09
Note: AG LS PE
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Published as Maurer, Raimond & Mitchell, Olivia S. & Rogalla, Ralph, 2009. "Managing contribution and capital market risk in a funded public defined benefit plan: Impact of CVaR cost constraints," Insurance: Mathematics and Economics, Elsevier, vol. 45(1), pages 25-34, August.

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Journal Article: Managing contribution and capital market risk in a funded public defined benefit plan: Impact of CVaR cost constraints (2009)
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