Utility-Equivalence of Pension Security Mechanisms

Abstract

Adequate funding of occupational pension plans is key to benefit security. Across countries different methods of securing funding exist: solvency requirements, a pension guarantee fund, and sponsor support. The key goal of this paper is to investigate the welfare implications to the beneficiary in a hybrid pension scheme. We show that the three security mechanisms can be made utility-equivalent by adjusting the pension contract specifications. The utility-equivalence approach could serve to strengthen the "holistic balance sheet" approach as advised by EIOPA. It enables regulators to compare various pension systems across Europe in a single framework from a utility perspective instead of a valuation perspective.

Keywords: Pension plans, pension regulation, guarantee systems, power utility, certainty equivalents

JEL Classification: G11, G23