A Value-Based Approach to the Redesign of US State Pension Plans

Z. Lekniute, R.M.W.J. Beetsma, E.H.M. Ponds

Research output: Working paperOther research output

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Abstract

This paper explores the financial sustainability of a typical U.S. state defined benefit pension fund under the continuation of current policies and under alternative policies, such as changes in contribution, indexation and investment allocation policies. We explore the "classic" asset-liability management (ALM) results, which indicate that a policy of conditional indexation may substantially improve the financial position of the fund. We also investigate the value-based ALM results, which provide a market-based evaluation of the net benefit changes to the various stakeholders of changes in the fund's policies. All cohorts of participants derive a substantial net benefit from the current pension contract, implying that tax payers have to make substantial contributions. The aforementioned adjustment measures can be instrumental in alleviating the burden on the tax payer, although this will happen at the cost of a reduction in the value of the contract to the fund participants.
Original languageEnglish
PublisherSSRN
Number of pages39
Publication statusPublished - 18 May 2014

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U.S. States
Pension plans
Redesign
Tax
Asset-liability management
Indexation
Burden
Stakeholders
Cohort
Pension funds
Evaluation
Sustainability
Pensions
Defined benefit
Investment allocation

Keywords

  • US state civil servants pension funds
  • underfunding
  • value-based ALM
  • contributions
  • benefits
  • indexation
  • participants
  • tax payers

Cite this

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A Value-Based Approach to the Redesign of US State Pension Plans. / Lekniute, Z.; Beetsma, R.M.W.J.; Ponds, E.H.M.

SSRN, 2014.

Research output: Working paperOther research output

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