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Risks 2015, 3(1), 77-102; doi:10.3390/risks3010077

Portability, Salary and Asset Price Risk: A Continuous-Time Expected Utility Comparison of DB and DC Pension Plans

1
Faculty of Mathematics and Economics, University of Ulm, Helmholtzstrasse 20, 89069 Ulm, Germany
2
German Federal Financial Supervisory Authority (Bafin), 53117 Bonn, Germany
*
Author to whom correspondence should be addressed.
Academic Editor: Nadine Gatzert
Received: 29 November 2014 / Accepted: 5 March 2015 / Published: 13 March 2015
(This article belongs to the Special Issue Life Insurance and Pensions)
View Full-Text   |   Download PDF [330 KB, uploaded 13 March 2015]   |  

Abstract

This paper compares two different types of private retirement plans from the perspective of a representative beneficiary: a defined benefit (DB) and a defined contribution (DC) plan. While salary risk is the main common risk factor in DB and DC pension plans, one of the key differences is that DB plans carry portability risks, whereas DC plans bear asset price risk. We model these tradeoffs explicitly in this paper and compare these two plans in a utility-based framework. Our numerical analysis focuses on answering the question of when the beneficiary is indifferent between the DB and DC plan. Most of our results confirm the findings in the existing literature, among which, e.g., portability losses considerably reduce the relative attractiveness of the DB plan. However, we also find that the attractiveness of the DB plan can decrease in the level of risk aversion, which is inconsistent with the existing literature. View Full-Text
Keywords: defined benefit plan; defined contribution plan; portability risk; asset price risk; salary risk defined benefit plan; defined contribution plan; portability risk; asset price risk; salary risk
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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Chen, A.; Uzelac, F. Portability, Salary and Asset Price Risk: A Continuous-Time Expected Utility Comparison of DB and DC Pension Plans. Risks 2015, 3, 77-102.

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