Smoothed return allocation

“Equal fluctuations in pension payments implementable in new Dutch pension scheme”

Pension funds may find it desirable that fluctuations in pension payments are equal for all retirees independent of their age. Moreover, in view of habit-formation preferences, they may wish to allocate returns in a smoothed way. We propose a concrete allocation mechanism that achieves both goals and satisfies the requirement that ex-ante redistributions of wealth are prohibited.

Key Takeaways for the Industry

• Equitable pension payments can be implemented in the new Defined Direct Contribution scheme.
• Clarity is needed about whether the stated capping of the assumed interest rate return in the proposed legislation is inclusive or exclusive of the effect of smoothing.