The economic value of pension entitlements takes an important role in the Dutch policy debate. If the economic value of accrued pension entitlements is not equal to the contribution that is paid, value transfers between participants can materialize.
This thesis is written at PGGM and makes use of their ALM model in case stochasticity of the economy is modeled.
Dutch regulations for second pillar pension schemes leave several opportunities that can cause value transfer to materialize. Of these opportunities three relevant settings are analyzed in which value transfers occur:
- Discounting method of the contribution differs from discounting method of funding ratio
- Participating in a fund with a surplus or a deficit
- The uniform accrual and contribution system
This thesis first introduces the basics about valuation and generational accounting. It is also explained that some important research on Dutch pension topics use deterministic calculations in linear pension contracts. This is because deterministic calculations are understandable and fast. Besides that, literature suggests that a change of the equity allocation in a fund with a linear pension contract, does not cause value transfers between participants. This last statement is widely known in the pension sector.
This thesis proceeds with an analysis of the three mentioned settings. This is done for pension funds with a linear pension contract in a deterministic setting. Dependent on the specific setting, value transfers can range from +60% of an annual income for young, to a loss of a full annual income for the retired in setting 1. Setting 2 shows value transfers that range from +40% for the retired to -20% of an annual income for the young and future generations when the pension fund has a 10% deficit. Setting 3 which is nowadays an important point of debate in the Netherlands leaves several sub-situations under which new value transfers can occur or existing value transfers can change. The value transfers range from +80% for the elderly to a permanent deficit for the future generations caused by the implicit pension debt.
Next, this thesis gives some elaboration on risk neutral valuation and Monte Carlo simulation. This allows to also study non linear pension contracts because from now on also stochasticity is incorporated in the calculations. The statement that a change of the equity allocation in a linear pension contract does not cause value transfers between participants is studied. It is found that this statement does not hold exact in a pension fund model that is not strictly bounded by mathematical assumptions. This could serve as an “eye-opener” for the Dutch pension sector.
The thesis proceeds with an analysis of the three mentioned settings in the pension fund model of PGGM. A link is made between the outcomes from the PGGM model and the results obtained from the earlier calculations in a linear pension contract under a deterministic setting. The results from the linear pension contracts show, as expected, some relevant similarities. It is also concluded that on a high level, the generational effects under the two nonlinear pension contracts, used in this thesis, do not deviate much from the generational effects found under the linear pension contract.