Demographic Risk in Pay-as-You-Go Pension Funds : A Solvency Index

The aim of this contribution is to study the sustainability of a pay-as-you-go pension fund, through the analysis of demographic risk affecting these types of pension funds. A model for the evolution of the fund is presented considering the stochastic variables global asset return and new entrants. It centre on the demographic variable "new entrants" and on its influence on the future dynamics of the fund. To assess the solvency of the fund, namely its capability to pay for future pensions, we propose a risk indicator based on the relationship between contributions and pensions.In particular we focus on the retirement funds of Italian Professional Orders, closed pension fund financed by pay-as-you-go. Numerical applications are carried out employing the data provided by the Italian Professional Orders' pension fund. The application demonstrates that the proposed controlling model appears effective for monitoring the solvency of the fund