Feasibility Test: Does it serve its purpose?

In this paper, we review the new feasibility test for pension funds, which is part of the updated Dutch regulatory framework known as FTK. The feasibility test involves a stochastic analysis of 60 years, which determines the fund’s risk-profile. Furthermore, it provides insight into the effects that the pension policy has on the purchasing power conservation of the accrued pension benefits among different generations. This paper’s contribution is threefold. First, we discuss the feasibility test in detail and highlight the results for three stylized pension funds. This study also presents a valuable tool for the implementation of the feasibility test, which is based on the generational accounting approach, as described by Chen et al. (2014). The paper’s second part evaluates the set of scenarios, which is based on a model prescribed by Koijen et al (2010) (KNW model). In particular, the model parameters are re-estimated with updated data through the use of the simulated annealing procedure, in accordance with the work of Draper (2014). This paper discusses the results in detail and examines various stylized facts in order to assess the model’s fit. In the final part, three alternative models are provided (based on three different types of interest rate models), including: (1) the CIR model (one- factor equilibrium model), (2) the G2++ model (a two-factor no-arbitrage model), and (3) the Libor Market Model. The models are estimated through the use of different estimation techniques. They are subsequently examined through an assessment of important features with respect to interest rate models, such as upward sloping average yields, a decreasing volatility of yields as well as a great variety of shapes over time.