Risk Sharing within Pension Schemes

The current redesign of the Dutch pension system includes the following elements: a defined contribution pension for each participant plus a solidarity buffer that serves as a risk-sharing mechanism to smooth returns between participants in the pension fund. In this paper we briefly summarize the literature on optimal risk sharing. We also assess the welfare effects of the current Dutch pension proposal and compare this to theoretically optimal risk sharing arrangements. We show that a solidarity buffer with sufficiently risky investment can achieve results that approximate the optimal utility benefits of “unconstrained” intergenerational risk sharing.