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Pension benefits of the elderly insufficiently protected against interest rate fluctuations

Published: 08th June 2020 Last updated: 08th June 2020

Under the current Dutch pension contracts, the pension benefits of participants age 60 and older are inadequately protected against interest rate fluctuations. The current defined benefits agreement, moreover, offers insufficient possibilities for distributing interest rate risk between young and old in a desirable manner.

Researchers Roel Mehlkopf (Tilburg University) and Servaas van Bilsen (University of Amsterdam) argue this in a Netspar analysis of the (implicit) distribution of equity and interest risk over the life cycle of pension fund participants. If not all interest rate risks are hedged, the long-term obligations of younger participants cause a lot of volatility in the funding ratio with a pension fund. This interest rate risk mainly arises with older participants.

The researchers note that the existing distribution scheme has little flexibility in the distribution rules for equity and interest rate risk. An important lesson for the future is that interest rate risk differs from equity risk and should therefore also be distributed differently over the lifetime of participants. An "ideal" pension contract would treat different types of risks differently and include enough "switches" for properly distributing risks among participants, young and old.

Want to know more?

On Thursday 11 June, at 10:00 am, researcher Roel Mehlkopf will present a webinar (in Dutch) in response to the Netspar Brief "Interest rate risk, lifecyle and pension contract". Register here: https://event.webinarjam.com/register/70/wyl00u4w