INTERGENERATIONAL RISK-SHARING ANDRISK-TAKING OF A PENSION FUND

By using their financial reserves efficiently, pension funds can smooth shocks on assetreturns, and can thus facilitate intergenerational risk-sharing. In addition to the primarybenefit of improved time diversification, this form of risk allocation affords the additionalbenefit of allowing these funds to take better advantage of the equity premium, which alsofavors the consumers. In this paper, our aim is twofold. First, we characterize the sociallyefficient policy rules of a collective pension plan in terms of portfolio management, capitalpayments to retirees, and dividend payments to shareholders. We examine both the first-bestrules and the second-best rules, where, in the latter case, the fund is constrained by a solvencyratio and by a guaranteed minimum return to workers’ contributions. Second, we measure thesocial surplus of the system compared to a situation in which each generation would save andinvest in isolation for its own retirement. One of the main results of the paper is that betterintergenerational risk-sharing does not reduce the risk born by each generation. Rather, itincreases the expected return to the workers’ contributions.