An assessment for a sustainable and generationally fair pension contract reform
This thesis examines a sustainable and generationally fair pension contract (reform). By means of a value-based ALM study, I indicate whether age cohorts gain or lose from a contract reform. I demonstrate that the current FTK pension contract ambition to safeguard a nominal pension while aspiring a real pension is not sustainable and fair across generations. First, for the current average funding position of the Dutch pension funds, the current FTK contract does not proportionally reward the elderly for the risks they are exposed to. Second, adjustments in the investment mix within the current FTK contract imply a significant redistribution of valuebetween age cohorts, caused by the asymmetric policy ladder. The advantage of a soft symmetric contract is that adjusting the investment mix will not lead to value transfers between the agecohorts. The value transfer from young to old, owing to a higher discount rate and a symmetric policy ladder, when switching from the current FTK to the soft symmetric pension contract can be minimized by an equalization reserve. I therefore propose the option either to ensure a hard nominal pension without mismatch risk or to switch to a soft pension contract. The cohorts who gain, and to what extent, if a soft real rather than a soft nominal pension contract is introduced,depends on the amortization period in relation to the duration of the nominal liabilities. Finally, fund characteristics as the funding ratio and indexation ambition contribute, in addition to the investment, buer and amortization policy, to the realization that the determination of one uniform applicable value transfer is hardly feasible. Notwithstanding the benefits of a soft symmetric contract, I indicate that this proposed pension contract will, in comparison to the current contract, not improve the distribution of equity exposure over the age cohorts.