Palmnet: A Pension Asset and Liability Model for the Netherlands

DNB Research Memorandum No. 760

57 Pages Posted: 24 Feb 2005

See all articles by Maarten van Rooij

Maarten van Rooij

De Nederlandsche Bank; Netspar

Arjen Siegmann

Vrije Universiteit Amsterdam, School of Business and Economics

Peter J.G. Vlaar

De Nederlandsche Bank - Econometrics

Date Written: April 2004

Abstract

This study presents a pension model geared to the typical pension contract in the Netherlands. It is based on a defined benefit/average earnings pension system. Nominal benefits are guaranteed and indexation is intended. The model provides a framework for analysing adjustments to such factors as the asset mix, retirement age, returns and the method of discounting, premium setting and indexation. The importance of uncertainty over inflation, interest rate movements and returns on shares is made explicit by means of stochastic and historical simulations. In this, PALMNET differs from existing, often deterministic pension models. The main findings are, first, a conditional wage-indexed defined benefit pension is still affordable despite the current shortfall of wealth of pension funds. If investment returns develop very unfavorable however, benefit cuts can cumulate to over 20% of total benefits and premiums may have to rise to more than 20% of gross wages. Second, fair value accounting considerably increases the volatility of pension premiums. Third, reducing risks by adjusting the asset mix towards more bonds is costly in terms of average premiums, but reduces the volatility.

Keywords: Actuarial pension model, Monte Carlo simulation, Historical simulation

JEL Classification: C15, C59, G23, J18

Suggested Citation

van Rooij, Maarten and Siegmann, Arjen and Vlaar, Peter J.G., Palmnet: A Pension Asset and Liability Model for the Netherlands (April 2004). DNB Research Memorandum No. 760, Available at SSRN: https://ssrn.com/abstract=672402 or http://dx.doi.org/10.2139/ssrn.672402

Maarten van Rooij

De Nederlandsche Bank ( email )

P.O. Box 98
Amsterdam, 1000 AB
Netherlands

HOME PAGE: http://www.dnb.nl/en/onderzoek-2/onderzoekers/overzicht-persoonlijke-paginas/dnb150127.jsp

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Arjen Siegmann

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, NOT IN US OR CANADA 1081 HV
Netherlands

HOME PAGE: http://https://research.vu.nl/en/persons/arjen-siegmann

Peter J.G. Vlaar (Contact Author)

De Nederlandsche Bank - Econometrics ( email )

P.O.B. 98
1000 AB Amsterdam
Netherlands

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