Association of British Insurers, 2000, The Pension System in the United Kingdom, in OECD, “Private Pensions and Policy Issues,” Private Pensions Series No. 1.
Carey, David, 2002, Coping with Population Ageing in the Netherlands, OECD Working Paper No. 325. International Monetary Fund, 2003, Global Financial Stability Report, March.
Hinz, Richard, 2000, Overview of the United States Private Pension System, in OECD, “Private Pensions and Policy Issues,” Private Pensions Series No. 1.
Kremers, Jeroen, J. M., 2002, Pension Reform. Issues in the Netherlands, in Martin Feldstein and Horst Siebert (Editors) Social Security Pension Reform in Europe, (Chicago: University of Chicago Press).
van Ewijk, Casper, and Martijn van de Ven, 2003, Pension Funds at Risk, CPB Report 2003/1, Quarterly Bulletin, March, pp. 22–27.
van Ewijk, Casper, Barthold Kuipers, Harry ter Rele, Martijn van de Ven, and Ed Westerhout, 2000, Ageing in the Netherlands, CPB Netherlands Bureau for Economic Policy Analysis.
Prepared by Enrica Detragiache.
Van Ewijk and others (2000) estimate that pension fund assets will reach 195 percent of GDP in the Netherlands by 2040.
The coverage ratio is the ratio between the assets of the fund and the present discounted value of its liabilities.
See Chapter II for a discussion of collective bargaining in the Netherlands. While this structure allows for risk-sharing within the industry, it virtually eliminates any potential competition among funds (van Ewijk and van de Ven, 2003).
By way of comparison, in the United States about half of employees with a pension plan have a defined benefit scheme. Some of these workers also have defined contribution plans as supplementary insurance (Hinz, 2000). In the United Kingdom, about 85 percent of pension plans are of a defined benefit type (Association of British Insurers, 2000). In both countries the trend has been toward defined contribution plans. For a theory of the costs and benefits of different types of company pension plans, see Bodie (1990).
This model can be easily adapted to the case of uncertain survival. If h is the probability of surviving in the second period, then the expected pension is h λ wt. Other factors that make the pension payment uncertain in practice, such as the fact that benefits depend on the wage in the last years before retirement rather than the current wage, that they may be only partially indexed to inflation, or may be indexed to wage developments over the retirement period would be more complex to integrate into the model.
The funding requirement may be enforced by making it a necessary condition for the pension plan to receive favorable tax treatment.
Workers also contribute, but this is immaterial to the extent that the firm is a price-taker in the labor market. See Section E below for a discussion of imperfect labor markets.
In the Netherlands, the regulator mandates that the actuarial interest rate must not exceed 4 percent, hence q cannot be less that 0.96.
In practice, Dutch pension funds are prohibited by their statutes from raising contributions more than a given amount in each year, so that the return to the regulatory level of coverage may be gradual over time. Also, as discussed in section E, the value of the funds has exceeded the regulatory minimum, but this possibility is ignored here for simplicity.
In the Netherlands, workers have no recourse against the assets of the sponsoring firm in the event it goes bankrupt and the plan is underfunded. This contrasts with the United States, where some benefits are guaranteed by the Pension Benefit Guarantee Corporation, and the firm is liable for up to 30 percent of unfunded guaranteed benefits (Bulow, 1982).
The boundary of ρrt+1 is a function of lt, but since V(lt, ρt+1)=0 for ρt+1 = ρr(lt) this can be ignored in computing ∂V/∂lt−.
On the interpretation of β in a general equilibrium framework, see for instance Blanchard and Fischer (1989), Chapter 6.
This is why regulators may require pension funds to be over funded (x>l). Of course, in practice shocks other than pension fund returns affect firm profitability and, hence, its decision to stay in business.
This is sometimes refereed to by practitioners as the cost-covering level of contributions.