Conditional indexation in defined pension plans

In the Netherlands, the typical pension contract nowadays comprises an average earnings defined benefit pension in which only nominal benefits are guaranteed, but with the intention to providewage indexation. In the new supervisory regime, the guaranteed pension rights, based on market valuation, are subject to risk-based solvency requirements. Provisioning is not required for conditional pension rights, though contributions have to be consistent with the indexation ambition, as communicated with the participants. This paper analyses to what extent indexation is indeed likely, given different indexation and contribution policies. Thereby, it explains how intergenerational risk sharing in defined benefit pension plans can provide a reasonable insurance of pension benefits against wage or price inflation. Moreover, it illustrates the tenability ofdefined benefit pension plans under ageing, the new fair-value accounting regimes, and possible volatility on financial markets. The analysis is based on a stochastic Pension Asset and LiabilityModel for the Netherlands (PALMNET). According to the PALMNET simulations, voluntary provisioning for indexation is to be recommended. Without reserving, indexation cuts may besevere and the solvency requirements incidentally lead to extreme premiums. Fully guaranteed indexation is virtually unaffordable under the new supervisory regime, because the real discount rate is generally both very low and volatile.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

MORE ABOUT NETSPAR


Mission en strategy           •           Network           •           Organisation           •          Magazine
Board Brief            •            Actionplan 2023-2027           •           Researchagenda

ABOUT NETSPAR

Our partners

vu
NN_logo_gray
B20190901_nidi-logo_greyscale
B20160708_apg
B20160708_ministeries
View all partners