Fair pensions

Ilja Boelaars, Dirk Broeders

Research output: Working paper / PreprintWorking paper


This paper examines the allocation of market risk in a general class of collective
pension arrangements: Collective Defined Contribution (CDC) schemes. In a CDC
scheme participants collectively share funding risk through benefit level adjustments. There is a concern that, if not well designed, CDC schemes are unfair and will lead to an unintended redistribution of wealth between participants and, in particular, between generations. We define a pension scheme as fair if all participants receive an arbitrage-free return on the market risk they bear. The fact that the participants’ claim the CDC schemes’ collective assets is expressed in terms of a stochastic future, makes the arbitrage-free allocation of market risk non-trivial. It depends crucially on the specification of the discount rate process in combination with the benefit adjustment process. We show that fair CDC schemes may use a default-free market interest rate in combination with a specific horizon-dependent benefit adjustment process. Alternative discount rates are also permissible, but require additional correction terms in the benefit adjustment process.
Original languageEnglish
PublisherDe Nederlandsche Bank
Number of pages46
Publication statusPublished - 2019

Publication series

SeriesDNB Working Paper

JEL classifications

  • h55 - Social Security and Public Pensions
  • g13 - "Contingent Pricing; Futures Pricing; option pricing"
  • g23 - "Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors"
  • j26 - "Retirement; Retirement Policies"
  • j32 - "Nonwage Labor Costs and Benefits; Private Pensions"


  • pension
  • retirement
  • asset pricing
  • fair value
  • intergenerational risk-sharing
  • funded pension systems


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