Stability of Participation in Collective Pension Schemes: An Option Pricing Approach

57 Pages Posted: 23 Oct 2015

See all articles by Damiaan Chen

Damiaan Chen

University of Amsterdam

Roel M. W. J. Beetsma

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); European Commission; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Tinbergen Institute; Netspar

Dirk Broeders

De Nederlandsche Bank; Maastricht University

Multiple version iconThere are 2 versions of this paper

Date Written: October 21, 2015

Abstract

This paper contributes to the discussion about mandatory participation in collective funded pension schemes. It explores under what circumstances individual participants exercise the option to exit such scheme if participation is voluntary. First, we show how the willingness to participate increases when there are more future exercise dates. Then, we show how the pension fund’s set of policy instruments can be designed to minimise the likelihood that cohorts exit the pension scheme. The instruments consist of contribution and indexation policies. Recovery of the funding ratio (ratio of assets over liabilities) to its regulatory target level may be based on uniform contributions or age-dependent contributions which are actuarially fair in expectation. Specifically, while the value of the exit-option deters younger workers from exiting the pension fund, a uniform contribution policy encourages older workers to stay in the pension scheme.

Keywords: defined-benefit and collective defined-contribution pension funds, participation decision, actuarially fair, uniform and age-dependent contribution, European, Bermuda and American option, Least Squares Monte Carlo simulations, stability

JEL Classification: C61, G23, J32

Suggested Citation

Chen, Damiaan and Beetsma, Roel M. W. J. and Broeders, Dirk, Stability of Participation in Collective Pension Schemes: An Option Pricing Approach (October 21, 2015). De Nederlandsche Bank Working Paper No. 484, Available at SSRN: https://ssrn.com/abstract=2677205 or http://dx.doi.org/10.2139/ssrn.2677205

Damiaan Chen (Contact Author)

University of Amsterdam ( email )

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Roel M. W. J. Beetsma

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM) ( email )

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Dirk Broeders

De Nederlandsche Bank ( email )

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