Evaluating the UK and Dutch defined benefit policies using the holistic balance sheet framework

Z. Chen, A. Pelsser, E.H.M. Ponds

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This paper compares the UK and Dutch occupational defined-benefit pension policies using the holistic balance sheet (HBS) framework. The UK DB pension system differs from the Dutch one in terms of the steering tools and adjustment mechanisms. In addition to the sponsor guarantee, the UK system has the protection from the Pension Protection Fund (PPF) that guarantees DB pension schemes’ funding shortfalls if the sponsors of the schemes are insolvent. The paper first introduces a multi-period model called value-based ALM to value the embedded options implied by both UK and Dutch pension policies and build the HBS. The HBS framework allows us to have a holistic view on the real and contingent assets and liabilities of a pension scheme and evaluate the impact of introducing a new policy for the stakeholders of the pension scheme. Then, we compare the results of a typical UK policy with a typical Dutch one. The comparison suggests the UK policy is better for participants but worse for the sponsor compared to the Dutch policy. The UK policy is more generous in indexation and participants do not have the burden to contribute to the funding recovery of the pension scheme. The PPF provides protection of the benefits up to a certain level if the sponsor is insolvent, thus, participants in a scheme with a UK pension policy are exposed to limited downside risk. On the other hand, the sponsor of the pension scheme with the UK policy shoulders a heavier burden to contribute to the recovery of the pension funding shortfalls than that of the pension scheme with the Dutch policy.
Original languageEnglish
Pages (from-to)89-102
JournalInsurance: Mathematics & Economics
Volume58
DOIs
Publication statusPublished - Sep 2014

Fingerprint

Recovery
Balance sheet
Defined benefit
Framework
Policy
Pension scheme
Adjustment
Sponsor
Evaluate
Pension policy
Burden
Funding
Pensions
Guarantee
Model
Pension funding
Liability
Stakeholders
Pension system
Downside risk

Keywords

  • holistic balance sheet
  • pension protection fund
  • value-based ALM
  • Dutch collective pension plan
  • UK defined-benefit pension plan
  • international-comparison

Cite this

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Evaluating the UK and Dutch defined benefit policies using the holistic balance sheet framework. / Chen, Z.; Pelsser, A.; Ponds, E.H.M.

In: Insurance: Mathematics & Economics, Vol. 58, 09.2014, p. 89-102.

Research output: Contribution to journalArticleScientificpeer-review

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