Financial Fairness and Conditional Indexation

Torsten Kleinow, Hans Schumacher

Research output: Book/ReportReportProfessional

Abstract

Collective pension contracts can generate advantages for their participants by implementing forms of risk sharing. To ensure the continuity of a collective scheme, it has to be monitored whether the contracts offered to participants are financially fair in terms of their market value. When risk sharing is implemented by means of optionalities such as conditional indexation, the analysis of financial fairness is not straightforward. In this paper, we use a stylised overlapping generations model to study financial fairness for a conditional indexation scheme. We find that financial fairness for all participants at all times is not feasible within a scheme of this type. However, financial fairness for incoming generations at the moment of entry can be realised. We show how to compute the fair contribution rate as a function of the current nominal asset/liability ratio for a given level of nominal entitlements. At low levels of the ratio, the fair contribution for incoming generations is also relatively low; nevertheless, the joining of a new generation still has a positive effect on the asset/liability ratio.
Original languageEnglish
Place of PublicationTilburg
PublisherNETSPAR
Number of pages45
Volume44
Publication statusPublished - Oct 2015

Publication series

NameNetspar Design Paper
PublisherNetspar
Volume44

Fingerprint

Fairness
Indexation
Liability
Assets
Risk sharing
Market value
Contribution rate
Continuity
Overlapping generations model
Entitlement
Pensions

Cite this

Kleinow, T., & Schumacher, H. (2015). Financial Fairness and Conditional Indexation. (Netspar Design Paper; Vol. 44). Tilburg: NETSPAR.
Kleinow, Torsten ; Schumacher, Hans. / Financial Fairness and Conditional Indexation. Tilburg : NETSPAR, 2015. 45 p. (Netspar Design Paper).
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Kleinow, T & Schumacher, H 2015, Financial Fairness and Conditional Indexation. Netspar Design Paper, vol. 44, vol. 44, NETSPAR, Tilburg.

Financial Fairness and Conditional Indexation. / Kleinow, Torsten; Schumacher, Hans.

Tilburg : NETSPAR, 2015. 45 p. (Netspar Design Paper; Vol. 44).

Research output: Book/ReportReportProfessional

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Kleinow T, Schumacher H. Financial Fairness and Conditional Indexation. Tilburg: NETSPAR, 2015. 45 p. (Netspar Design Paper).