Evaluating UK defined-benefit pension policies from the Dutch perspective

  • Zhiqiang Chen Zhiqiang Chen

This thesis evaluates the UK de ned bene t (DB) pension policies from the Dutch perspective using the holistic balance sheet (HBS) approach. The UK DB pension system differs from the Dutch one in terms of the steering tools and adjustment mechanisms. Inaddition to the sponsor guarantee, the UK system has the protection from the Pension Protection Fund (PPF) that guarantees DB pension schemes’ funding shortfalls if the sponsors of the schemes are insolvent. The thesis first derives an analytical formula to value theembedded option implied by the PPF guarantee. Then a one-period model is developed to demonstrate how to build an HBS with the PPF guarantee option. To include more real-life features, we further use a multi-period model called value-based ALM to value the embedded options implied by UK pension policies and build the HBS. The HBS allows us to have a holistic view of the real and contingent assets and liabilities of a pension scheme and evaluate the impact of introducing a new policy on the stakeholders of the pensionscheme. Finally, we compare the results of a typical UK policy with the HBS of a typical Dutch policy. The comparison suggests the UK policy is better for participants but worse for the sponsor compared to the Dutch policy. The UK policy is more generous in indexa-tion and participants do not have the burden to contribute to the funding recovery of the pension scheme. The PPF provides protection of the bene ts up to a certain level if the sponsor is insolvent, thus participants in a scheme with a UK pension policy are exposedto limited downside risk. On the other hand, the sponsor of the pension scheme with the UK policy shoulders a heavier burden to contribute to the recovery of the pension funding shortfalls than that of the pension scheme with the Dutch policy. Although this thesis does not address whether the PPF itself will be sustainable given its current policies, we find in our multi-period model that the ex post value of the PPF guarantee option provided by thePPF to the pension scheme is considerably less than the ex post value of the levy option that PPF charges from the pension scheme.

Netspar, Network for Studies on Pensions, Aging and Retirement, is een denktank en kennisnetwerk. Netspar is gericht op een goed geïnformeerd pensioendebat.


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