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The Impact of Pension Funding Mechanisms on the Stability and Payoff from Swiss DC Pension Schemes: A Sensitivity Analysis

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  • Philipp Müller

    (University of Lausanne)

  • Joël Wagner

    (University of Lausanne)

Abstract

Adequately funding occupational pension funds is a major concern for society in general and individual contributors in particular. The low returns accompanied with high volatility in capital markets have put many funds in distress. While the basic contributions are mostly defined by the state, the fund’s situation may require additional contributions from the insureds or may allow the distribution of surpluses. In this paper, we focus on the accumulation phase of a defined contribution plan in Switzerland with minimum returns and annual solvency targets in terms of an assets-to-liabilities funding ratio. From the viewpoint of the pension fund, we evaluate the outcome of selected funding mechanisms on the solvency situation. Taking the perspective of the contributors, we analyse the payoff and the utility. Combining both prospects, we discuss the boundary values that trigger the various participation mechanisms and their impact. We find that remediation measures, while stabilising the fund, yield a higher volatility in the insureds contributions. Further, surplus distributions lower the relative payoff utility of the funds members and increase the frequency of remediation measures. Overall, insureds and pension funds will profit from a cautious surplus distribution policy that focuses on keeping the stability high and lowers the volatility of the result.

Suggested Citation

  • Philipp Müller & Joël Wagner, 2017. "The Impact of Pension Funding Mechanisms on the Stability and Payoff from Swiss DC Pension Schemes: A Sensitivity Analysis," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 42(3), pages 423-452, July.
    • Handle: RePEc:pal:gpprii:v:42:y:2017:i:3:d:10.1057_s41288-017-0048-1
    DOI: 10.1057/s41288-017-0048-1
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    References listed on IDEAS

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