Intergenerational risk sharing within funded pension schemes

We study risk sharing between generations in a variety of realistic collective funded pension schemes, where pension benefits and contributions may depend on the funding ratio and the asset returns. The collective pension schemes organizing the intergenerational risk sharing are optimised with respect to the risk allocation rules, the asset allocation rules and the generosity of pension benefits. Using contingent claims valuation method, we calculate the market value of the transfers between generations. We perform a welfare comparison between the collective plans and the optimal individual pension scheme without risk sharing. We show that well-structured intergenerational risk sharing is a zero-sum game in market valueterms, but welfare-enhancing above the optimal individual benchmark. To some extent, even initially underfunded collective funds may provide higher utilities than the optimal individual benchmark.