Evaluating the UK and Dutch defined-benefit pension policies using the holistic balance sheet framework |
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| Affiliation: | 1. Maastricht University, Netherlands;2. Tilburg University, Netherlands;3. APG, Netherlands;4. Netspar, Netherlands;5. Kleynen Consultants, Netherlands;1. Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA), Université catholique de Louvain (UCL), Belgium;2. Département de Mathématiques, Université du Québec à Montréal (UQAM), Canada;3. Faculty of Economics and Business, KU Leuven, Belgium;4. Faculty of Economics and Business, University of Amsterdam, The Netherlands;1. Kotelnikov Institute of Radio Engineering and Electronics of the Russian Academy of Sciences (Saratov Branch), Saratov 410019, Russia;2. National Research Saratov State University, Saratov 410012, Russia;3. Key Laboratory of Nanodevices and Applications, Suzhou Institute of Nano-Tech and Nano-Bionics (SINANO), Chinese Academy of Sciences, Suzhou 215123, China;1. DFG Research Training Group 1100, University of Ulm, Ulm, Germany;2. Institut de Statistique, Biostatistique et Sciences Actuarielles, Université Catholique de Louvain, Louvain-la-Neuve, Belgium;3. Department of Actuarial Mathematics and Statistics, School of Mathematical and Computer Sciences, Heriot-Watt University, Edinburgh, United Kingdom;1. TU Dortmund University, Faculty of Mathematics, Vogelpothsweg 87, D-44227 Dortmund, Germany;2. TU Dortmund University, Faculty of Economics and Social Sciences, Otto-Hahn-Str. 12, D-44227 Dortmund, Germany;3. International Energy Company, Vienna, Austria;4. University of Leipzig, Faculty of Economics, Grimmaische Str. 12, D-04107 Leipzig, Germany;1. Department of Statistics, Ewha Womans University, Seoul, Republic of Korea;2. Department of Statistics and Actuarial Science, Simon Fraser University, BC, Canada;3. Department of Mathematics and Statistics, Concordia University, Montreal, QC, Canada |
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| Abstract: | This paper compares the UK and Dutch occupational defined-benefit pension policies using the holistic balance sheet (HBS) framework. The UK DB pension system differs from the Dutch one in terms of the steering tools and adjustment mechanisms. In addition 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 paper first introduces a multi-period model called value-based ALM to value the embedded options implied by both UK and Dutch pension policies and build the HBS. The HBS framework allows us to have a holistic view on the real and contingent assets and liabilities of a pension scheme and evaluate the impact of introducing a new policy for the stakeholders of the pension scheme. Then, we compare the results of a typical UK policy with a typical Dutch one. 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 indexation and participants do not have the burden to contribute to the funding recovery of the pension scheme. The PPF provides protection of the benefits up to a certain level if the sponsor is insolvent, thus, participants in a scheme with a UK pension policy are exposed to 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. |
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| Keywords: | Holistic balance sheet Pension Protection Fund Value-based ALM Dutch collective pension plan UK defined-benefit pension plan International-comparison |
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