Pricing risk in corporate pension plans

Understanding the real pension deal

R. Hoevenaars, T. Kocken, E.H.M. Ponds

Research output: Contribution to journalArticleScientificpeer-review

Abstract

New accounting rules and increased scarcity of risk capital have led to growing pressure on corporations to shift pension plan risk from employers to participants. This implies a shift from Defined Benefit (DB) plans to a variety of collective and individual Defined Contributions (DC) plans. Most of these shifts have been ad-hocand not based on clear and objective criteria. This article shows how negotiations could be clarified by using modern option pricing and financing techniques. Both the value of the guarantees regarding accrued pension rights, as well as future rights to be accrued, can be objectively determined. For example, the authors show that a shiftfrom a typical DB to a collective DC plan should cost the employer a lump sum payment of twelve percent of the accrued pension obligations and an increase in the contribution rate at four percent of pay.
Original languageEnglish
Pages (from-to)56-62
JournalRotman International Journal of Pension Management
Volume2
Issue number1
Publication statusPublished - 2009

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Pension plans
Employers
Pensions
Pricing
Defined contribution plan
Defined benefit
Financing
Risk capital
Payment
Contribution rate
Option pricing
Obligation
Scarcity
Guarantee
Costs

Cite this

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abstract = "New accounting rules and increased scarcity of risk capital have led to growing pressure on corporations to shift pension plan risk from employers to participants. This implies a shift from Defined Benefit (DB) plans to a variety of collective and individual Defined Contributions (DC) plans. Most of these shifts have been ad-hocand not based on clear and objective criteria. This article shows how negotiations could be clarified by using modern option pricing and financing techniques. Both the value of the guarantees regarding accrued pension rights, as well as future rights to be accrued, can be objectively determined. For example, the authors show that a shiftfrom a typical DB to a collective DC plan should cost the employer a lump sum payment of twelve percent of the accrued pension obligations and an increase in the contribution rate at four percent of pay.",
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Pricing risk in corporate pension plans : Understanding the real pension deal. / Hoevenaars, R.; Kocken, T.; Ponds, E.H.M.

In: Rotman International Journal of Pension Management, Vol. 2, No. 1, 2009, p. 56-62.

Research output: Contribution to journalArticleScientificpeer-review

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T2 - Understanding the real pension deal

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AU - Kocken, T.

AU - Ponds, E.H.M.

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Y1 - 2009

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AB - New accounting rules and increased scarcity of risk capital have led to growing pressure on corporations to shift pension plan risk from employers to participants. This implies a shift from Defined Benefit (DB) plans to a variety of collective and individual Defined Contributions (DC) plans. Most of these shifts have been ad-hocand not based on clear and objective criteria. This article shows how negotiations could be clarified by using modern option pricing and financing techniques. Both the value of the guarantees regarding accrued pension rights, as well as future rights to be accrued, can be objectively determined. For example, the authors show that a shiftfrom a typical DB to a collective DC plan should cost the employer a lump sum payment of twelve percent of the accrued pension obligations and an increase in the contribution rate at four percent of pay.

M3 - Article

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