Pension Benefit Security: A Comparison of Solvency Requirements, a Pension Guarantee Fund, and Sponsor Support

Authors

  • Dirk Broeders,

    1. Dirk Broeders is at De Nederlandsche Bank (DNB), Supervisory Policy Division, Strategy Department, P.O. Box 98, 1000 AB Amsterdam, the Netherlands. An Chen is at the Department of Economics, University of Bonn, Adenauerallee 24-42, 53113 Bonn, Germany. Broeders can be contacted via e-mail: dirk.broeders@dnb.nl. The authors are grateful to two anonymous referees, Anna Rita Bacinello, Paul Cavelaars, Marien de Haan, Birgit Koos, Jing Li, Marco Navone, and David Rijsbergen. The views expressed in this article are personal and do not necessarily reflect those of DNB or the University of Bonn.
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  • An Chen

    1. Dirk Broeders is at De Nederlandsche Bank (DNB), Supervisory Policy Division, Strategy Department, P.O. Box 98, 1000 AB Amsterdam, the Netherlands. An Chen is at the Department of Economics, University of Bonn, Adenauerallee 24-42, 53113 Bonn, Germany. Broeders can be contacted via e-mail: dirk.broeders@dnb.nl. The authors are grateful to two anonymous referees, Anna Rita Bacinello, Paul Cavelaars, Marien de Haan, Birgit Koos, Jing Li, Marco Navone, and David Rijsbergen. The views expressed in this article are personal and do not necessarily reflect those of DNB or the University of Bonn.
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Abstract

Developed countries apply different security mechanisms in regulation to protect pension benefits: solvency requirements, a pension guarantee fund (PGF), and sponsor support. We compare these mechanisms for a generalized form of hybrid pension schemes. We calculate the expected log return for the beneficiaries, the shortfall probability, that is, the likelihood of the pension payment falling below the promised level and the expected loss given shortfall. Comparing solvency requirements to a pension guarantee system or sponsor support involves trading off risk and return. Additional spending on default insurance reduces the shortfall probability and the expected loss given shortfall but also lowers the probability of high positive returns as are feasible under solvency requirements.

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