A value-based approach to pension redesign in the US state plans
This paper explores the financial sustainibility of a typical U.S. state dened-benefit pension fund under the continuation of current policies and under alternative policies, such as alternative contribution, indexation and investment allocation policies. We explore the “classic” asset-liability management (ALM) results, which indicate that a policy of conditional indexation may substantially improve the financial position of the fund. We also investigatethe value-based ALM results, which provide a market-based evaluation of the net benefits of the contract to the various stakeholders. All participant cohorts under our simulation horizon derive a substantial net benefit from the pension contract, implying that tax payersmake substantial contributions to this pension arrangement. The aforementioned measures can be instrumential in alleviating the burden on the tax payer, though this will happen at the cost of a reduction in the value of the contract to the participants.