Resilienz und Generationengerechtigkeit bei Collective Defined Contribution Pension Funds

Resilienz und Generationengerechtigkeit bei Collective Defined Contribution Pension Funds


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All over the world defined benefit pension plans (DB-plans) are in retreat, meaning that young employees entering working life must accept defined contribution pension plans (DC-plans). There are several reasons for this development, including: increased risk awareness among employers, intensified regulation and a low interest rate environment.

Employees and labor unions regard the shift from DB to DC as a massive reduction of labor rights since the investment risk is put on the weak shoulders of employees. This fact cannot be denied. However, one can also argue that the transition from DB to DC is just the proof that DB plans are unsustainable in the sense that they lack flexibility to adjust to a changed economic environment. As a consequence, inevitable adjustments had to be made by closing old DB systems and in doing so putting the financial burden of the obsolete DB plans on the shoulders of the younger generation. This generation is hit twice since at the same time the social security pension systems are under reconstruction with the obvious outcome for the young.

Compared to DB-plans, pure (individual) DC-plans are “over-reactive” in the sense that pension benefits are directly linked to the time value of pension asset. Equity market shocks, shifts of the yield curve or changing life expectancy instantaneously hit the expected pension or the pension in payment.

The idea behind collective DC- (CDC-) plans is to introduce a collective reserve to a DC-plan to buffer external shocks or shifts in order to stabilise (expected) pension payments. Payments into and withdrawals from the collective reserve constitute an intergenerational transfer of assets. We present a multi generation CDC-pension model including rules for when and how the intergenerational transfer is implemented. The main purpose of this talk is to introduce the concept of resilience to a pension system. Resilience is the ability of a system to absorb (single) external shocks and to adapt to (permanent) shifts of the socio-economic environment. Our approach allows us to measure explicitly the intergenerational transfer.

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