Consequences for welfare and pension buffers of alternative methods of discounting future pensions

We explore the implications of alternative methods of discounting future pension outlays for the valuation of funded pension liabilities. Measured liabilities a¤ect the asset-liabilityratio of pension funds and, thereby, their policies. Our framework for analysis is an applied many-generation OLG model describing a small open economy with heterogeneous agents and a two-pillar pension system (with PAYG and funded tiers) calibrated to that in the Nether-lands. We compare mark-to-market discounting against various alternatives, such as discounting against a moving average of past market curves or a curve that is constant over time.The pension bu¤er is stabilized by adjusting indexation and contribution rates in response to demographic, economic and financial shocks in the economy. Mark-to-market valuation of liabilities produces substantially higher volatility in the pension bu¤ers, but it also generates slightly higher aggregate welfare.