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

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.

New Concept of Pension Funds Performance Evaluation

“…Interesting fact remains, that in spite of wide usage of the Figure 1 to illustrate performance, when official performance results are presented 3 , the National bank of Slovakia methodology is used, not changes, which can be seen at the Figure 1. Currently in Slovakia was established practice that changes in PUCV (at best weighted changes) are considered as the performance of pension funds in the period.…”

Optimal supervisory rules for pension funds under diverse pension security mechanisms

“…2 If s T, the pension fund is liquidated immediately at s. 3 The boundary case g ¼ 1 means that the regulator does not tolerate even the slightest underfunding. g ¼ 0 corresponds to a complete absence of a regulator, in this case a default is impossible and thus s ¼ 1.…”

“…We consider the pension plan for a representative beneficiary who has to work for another T years, as in Broeders and Chen [3]. Let us assume that at time t 0 ¼ 0 a conditionally indexed defined benefit pension plan is issued to a representative beneficiary who provides an upfront contribution L 0 .…”

“…We assume that the pension benefits are paid out as a lump sum at time T. Following Broeders and Chen [3], we assume that the pension funds' payoff of a conditionally indexed defined pension plan to the beneficiary is given by 1…”

“…Rymaszewski, Schmeisser and Wagner [10] introduce the concept of utility-based premiums. Broeders and Chen [3] compare the three security mechanisms in terms of the market value of pension liabilities and of the protection offered to pension beneficiaries in relation to the costs of the provided security.…”