Roy P. M. M. Hoevenaars

Pricing Risk in Corporate Pension Plans: Understanding the Real Pension Deal

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-hoc and 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 shift from 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.

Public Investment Funds and Value-Based Generational Accounting

Governments in various countries are holding large pools of resources managed for public goals. These pools are known under different names, like sovereign wealth funds, public investment funds, pension funds, saving funds, intergenerational funds and so on, reflecting their different historical roots and orientation. Mitchell et al. (2008) make a distinction between three types of publicly held funds, or of public investment funds as they call these funds: (i) reserve funds held for currency stabilization and macroeconomic stabilization purposes; (ii) sovereign wealth funds (SWF) accumulated from natural resource taxes or from fiscal surpluses aimed at sharing the revenues of the exploitation of natural resources with future generations (Norway, Kuwait, Abu Dhabi); and (iii) public pension funds built up either through an explicitly funded arrangement or the result of prefunding the foreseeable increase in social security benefits because of ageing (Japan, Canada).