Collective Pensions with Intergeneational Risk-Sharing

We study the impact of intergenerational risk-sharing on the pension results of an individual pension contract. In this contract equity risk is shared across di↵erent generations by means of a collective bu↵er. This bu↵er enables investing more in risky assets, without pension plan participants being exposed to high equity risk. The individual pension contract with bu↵er o↵ers participants of the pension fund the possibility to choose (and change) their own level of risk-aversion. We examine the e↵ect of varying investment policies and the additional e↵ect of the collective bu↵er on the pension results. Monte Carlo simulations lead to pension distributions for the di↵erent designs of the pension contracts. We find in general that the bu↵er lowers but stabilizes the pension outcomes on average. However, when we can accurately predict the stock return distribution and we apply this distribution in the way we construct the contracts, some individual pension contracts with a collective bu↵er outperform the individual contracts without a bu↵er. We perform the analysis both for fixed and variable pension contracts. Compared to fixed pensions, variable pensions lead on average to higher pension outcomes.