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The authors are grateful for comments received from Barry Johnston, Inci Otker-Robe, Alex Tieman and Christian Mulder.
Underwriting risks covering all risks related to human life conditions, e.g., death, disability, longevity, but also birth, marital status, age, and number of children (e.g., in collective pension schemes).
We exclude P&C insurers as they have very short term liabilities and do not typically provide savings products and financial guarantees.
See Demirguc-Kunt and Levine (1999) for a definition. In bank-based systems banks play a leading role in mobilizing savings, allocating capital, overseeing the investment decisions of corporate managers, and providing risk management vehicles. In market/capital-based systems securities markets share center stage with banks in allocating savings to firms, exerting corporate control, and easing risk management.
Reflecting the longer term liability structure of contractual savings.
Normally a final cash balance to be withdrawn in the form of a lump-sum, phased withdrawal or annuity, or any combination of these types of benefits.
Exceptions would include mandatory national provident funds very common in former British colonies where only one DC plan serves the labor force or the specific labor force group (civil servants, armed forces, et cetera).
Notice that the figure approximates the DB/DC split in pension systems by looking at financial assets. Indeed, in many countries, DB plans are funded to a variable degree.
See the subsequent references to the differences between solvency and accounting standards for U.S. public plans and private sector corporate state plans.
Longevity-linked instruments are becoming an effective way to share the stochastic component of longevity risk (the systemic component can only be shared abroad). For more information, see Blake et al. (2006).
The difference is mainly accounted for by private pensions managed by insurance companies.
U.S. public plans are reported to have on average 60 percent of assets in equities.
This method determines the amount of contribution expenses that the sponsor needs to transfer in the plan to fund liabilities. See later for the difference in valuation methods for accounting and solvency purposes.
Guarantees typical on VA products include gguaranteed minimum account value or minimum income on annuitization (at a point many years into the future) and guaranteed minimum withdrawal benefits.
Hence, in order to effectively diversify macro risks, pension systems should have a combination of both DB and DC plans. As far as pension system design is concerned, it is in general advantageous to combine funded and PAYG systems, since they have different risk sharing characteristics, with respect to both market risk and political risk. It is probably a good idea to combine a DB component with a DC component so that economic risks can be shared both across and within generations.
For a discussion of the difference between valuation methods for funding and accounting purposes and for a comparative analysis of funding regimes in select OECD countries, see Pugh (2006) and (2008) and Yermo (2007).
This method is often referred to as accrued benefit obligation (ABO) method.
This method is often referred to as projected benefit obligation (PBO) method.
Spain, for instance.
See appendix for a brief summary of the concerns related to FAS 87.
In the United States this was mainly due to the 170 basis points drop in the 30 year yield driven by the implementation of the zero interest rate policy and quantitative easing by the Fed and by the 65 basis points decline in the long-dated AA corporate bond spread.
The sharp asset decline in the United States is given by the above average exposure to equity risk. The average DB plan has an asset allocation of 60 percent in equities, 30 percent in fixed income, and 10 percent in other assets.
This is not strictly speaking an issue of regulatory forbearance. Article 74 of the SPP Law in Peru allows the supervisor to agree on a time frame within which pension firms need to comply with the rules (FIAP (2007), pag 11).
Implemented in 1961, Sweden’s guarantee scheme is the oldest and has been followed by the United States (1974), Germany (1974), Ontario, Canada (1980), Switzerland (1986), Japan (1989), and the United Kingdom (2005). Partly due to low pricing of premiums, weak funding rules, and limited adjustment for plan sponsor risk, guarantee schemes in the United States, the United Kingdom, and Ontario, Canada were in deficit in 2008. For a discussion about these insurance schemes, see Stewart (2007).
This appendix has a mere illustrative purpose to provide a sense of the financial stability concern related to the relationship between U.S. corporates and NBFI institutions like DB plans. It a summary of Draghi et al. (2003), Coronado et al. (2008) and Fore (2004) and it is not representative of the many treatments of the same the subject.
The average plan in the United States uses 9 percent as expected return on assets and uses 7 percent to discount liabilities.