Pension Contracts and Risk Sharing – A Level Playing Field Comparison

Many countries witness an ongoing debate on how current pension contracts could be improved, compare for example the Netherlands and the United Kingdom regarding 2nd pillar pensions. A recurring and important question is whether and to what extent it is desirable to share risks in a pension contract. The UK Government is introducing new legislation to facilitate the development of shared risk schemes and collective benefits in the UK.Collective pension schemes with alternative models of risk sharing already exist, or are in development, in a number of countries outside the UK, including the Netherlands, Denmark and Canada. This study aims to contribute to the UK pension debate by addressing the quantitative impact of risk sharing within pension contracts. Therefore, we evaluate the performance of an individual (no risk sharing) and a collective (with risk sharing) pension contract based on an ALM model. We make use of a stylized model and construct a level playing field between these contracts in order to show the quantitative advantages of sharing risks between generations. This paper evaluates a risk sharing contract which is inspired by the recent Dutch discussion which could be interesting for the UK discussion as well