Market Valuation,Pension Fund Policy and Contribution Volatility |
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Authors: | Maarten Van Rooij Arjen Siegmann Peter Vlaar |
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Institution: | (1) Economics & Research Division, De Nederlandsche Bank and Netspar, P.O. Box 98, 1000 AB Amsterdam, The Netherlands;(2) Department of Finance, Free University of Amsterdam, De Boelelaan 1105, 1081 HV Amsterdam, The Netherlands;(3) Economics & Research Division, De Nederlandsche Bank and Netspar, P.O. Box 98, 1000 AB Amsterdam, The Netherlands |
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Abstract: | Summary Market valuation is becoming more and more popular, both in accounting and regulation, as well as in academic circles. For
pension funds and their participants, the knowledge that market-valued pension liabilities can indeed be transferred to a
third party, if necessary, is a great virtue. Using a simulation model, this paper demonstrates the implicit costs and benefits
of using market valuation for a typical Dutch pension fund, which offers a guaranteed average pay nominal pension with conditional
indexation. The impact turns out to be fairly small, if fixed discount rates are still used for conditional rights. However,
if market valuation is used for both unconditional and conditional rights, contribution volatility increases significantly.
A remedy is to increase the duration of assets considerably. It is not clear, though, whether this option is available for
large pension funds given the limited supply of long-term bonds.
This paper benefited from discussions at seminars at DNB, PVK, ABP and CPB. We are grateful to Jan-Marc Berk, Dirk Broeders,
and Peter van Els for useful suggestions and comments on a previous version of the paper. Views expressed are those of the
authors and do not necessarily reflect official positions of De Nederlandsche Bank. |
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Keywords: | asset and liability management conditional indexation defined benefit pension funds fair value versus actuarial discounting Monte Carlo simulation pension liabilities |
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