An Analysis of Occupational Pension Provision: From Evaluation to Redesign

Around the turn of the 21st century, the “perfect storm” implied by low interest rates, poor stock market returns and an ageing society led collective pension plans into underfunded situations and caused considerable concerns over their financial sustainability. This thesis analyzes the prevailing collective pension plans in the Netherlands and makes suggestions on improving the occupational pension provision in changing demographic, financial and regulatory environments. Chapter 2 probes the pension investment performance at the overall plan level. We find that pension plans on average do not outperform their pre-selected benchmarks, reflecting that trustees fail to select superior asset management strategies. Comparatively, however, large plans outperform their smaller peers. Chapter 3 investigates the strategic asset allocation of pension plans under market consistent valuation. We find that a slight change in the model specification of asset return dynamics can have a significant impact on the optimal mix. In chapter 4, we propose a new generational plan design and find that it provides higher value and welfare to participants when compared with the current collective plan design. This is due to the fact that it allows for risk sharing via time diversification of long-term investments and prevents a-priori value transfers. To allow for intergenerational risk sharing, in Chapter 5 we introduce further design improvements by having generations trade contingent claims among them. Our estimates show that the guarantees are affordable and the surplus call option has substantial value. The option prices also give an indication of value tranfers in traditional collective pension designs.

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