Risk Sharing and Individual Lifecycle Investing in Funded Collective Pensions

The paper deals with the question of whether it is possible to combine the insights and recommendations of optimal individual lifecycle investing with the proven gains of defined benefit pension funds. These gains primarily stem from cost efficiency and (intergenerational) risk sharing. We investigate this subject for a concrete case, the pension fund sector in the Netherlands. Dutch pension funds traditionally are strong in organizing intergenerational risk sharing. There is a nation-wide strong support among participants, employers and labour unions to continue with these collaborative funds; however stakeholders agree that renewal continuously is needed to adapt the system to an ever changing environment.The paper explores two variants to the current setup. Both variants aim to combine collective risk sharing with the recommendations of individual lifecycle investing. One route is by adding return-related indexation policy to the current widespread practice of wage-related indexation policy. The second route is that participants have age-dependent stakes in an individual plan without risk sharing and a defined benefit plan with risk sharing