Valuation analysis of funded notional defined contributions pensions exposed to stochastic demographics

We carry out a market consistent valuation of funded Notional Defined Contributions (NDC) pension plans implemented on a national scale or a scale wide enough to make it sensitive to stochastic demographics. We report the f air values of expected returns on participating in such programs and compare it with the benchmark returns on individually saving and investing in the financial markets. Our results show that NDC benefits have higher short run exposure to market risks; however, the very high growth rate of NDC benefits renders its long run exposure rate, making it a safer investment with a lower expected return. We repeat the analysis for different scenarios with several values of fertility parameters and fund conditions. In each case, we characterise the exposure to risk and expected returns of the system. Our framework features an affine term structure (static and dynamic), and we price three risks (real rate, inflation and equity) out of eight different stochastic shocks driving the model.