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What Drives Pension Indexation in Turbulent Times? An Empirical Examination of Dutch Pension Funds

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  • Dirk Broeders
  • Paul Hilbers
  • David Rijsbergen
  • Ningli Shen

Abstract

This paper identifies the key factors influencing indexation decisions in turbulent economic times within defined benefit plans using a unique panel dataset of 166 Dutch pension funds from 2007 to 2010. Key drivers of indexation are the funding ratio, inflation and real wage growth. The type of pension fund and the interest rate exposure are also statistically significant, although the latter effect is nonlinear. The asset allocation has no significant effect on the level of provided indexation as this is already captured by the funding ratio. We also examine the relation between policy ladders and the actual level of provided indexation. This study finds that a policy ladder with an upper limit equal to a 100 % real funding ratio is able to predict the actual level of indexation more accurately than a ladder with an upper limit based on a pension fund’s required nominal funding ratio. The latter tends to overestimate the actual level of indexation. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Dirk Broeders & Paul Hilbers & David Rijsbergen & Ningli Shen, 2014. "What Drives Pension Indexation in Turbulent Times? An Empirical Examination of Dutch Pension Funds," De Economist, Springer, vol. 162(1), pages 41-70, March.
    • Handle: RePEc:kap:decono:v:162:y:2014:i:1:p:41-70
    DOI: 10.1007/s10645-014-9223-y
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    Cited by:

    1. Mauro Mastrogiacomo & Yue Li & Rik Dillingh, 2022. "The displacement effect of compulsory pension savings on private savings. Evidence from the Netherlands, using pension funds supervisory data," Working Papers 474, DNB.
    2. Dirk W.G.A. Broeders & Damiaan H.J. Chen & Peter A. Minderhoud & C.J. Willem Schudel, 2021. "Pension Funds' Herding," International Journal of Central Banking, International Journal of Central Banking, vol. 17(1), pages 285-330, March.
    3. Broeders, Dirk W.G.A. & van Oord, Arco & Rijsbergen, David R., 2016. "Scale economies in pension fund investments: A dissection of investment costs across asset classes," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 147-171.

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    More about this item

    Keywords

    Indexation; Policy ladders; Defined benefit pension plans; G12; G13; G23;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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