Palmnet : A Pension Asset and Liability Model for the Netherlands

This study presents a pension model geared to the typical pension contract in the Netherlands. It is based on a defined benefit/average earnings pension system. Nominal benefits are guaranteed and indexation is intended. The model provides a framework for analysing adjustments to such factors as the asset mix, retirement age, returns and the method of discounting, premium setting and indexation. The importance of uncertainty over inflation, interest rate movements and returns on shares is made explicit by means of stochastic and historical simulations. In this, PALMNET differs from existing, often deterministic pension models. The main findings are, first, a conditional wage-indexed defined benefit pension is still affordable despite the current shortfall of wealth of pension funds. If investment returns develop very unfavorable however, benefit cuts can cumulate to over 20% of total benefits and premiums may have to rise to more than 20% of gross wages. Second, fair value accounting considerably increases the volatility of pension premiums. Third, reducing risks by adjusting the asset mix towards more bonds is costly in terms of average premiums, but reduces the volatility