Defined benefit pension plans and regulation

In this paper, it is investigated to what extent optimal investment policy by defined benefit pension funds is affected by an increased emphasis on market valuation in regulation. A policy based solely on market interest rates turns out to lead to higher costs than one basedon a fixed actuarial rate, as high pension premiums are to be payed exactly when expected future returns are low. In practice, this timing disadvantage hardly affects Dutch pension funds however, as Dutch solvency requirements are only applied to guaranteed pensionrights, whereas a major part of pension benefits (indexation) is conditional. Moreover, a fixed discount rate may still be used to calculate pension premiums. Regarding the asset mix, the optimal duration of bonds in portfolio seems to be much higher than currentlyobserved, both under market valuation and under a fixed discount rate method. The new regulatory rules only slightly reduce the attractiveness of equity investment.