Can we afford a defined benefit pension?

Arbeitspapier

CA representative pensioner is considered for the evaluation of some of the cost factors for the career-average-revalued-earnings (CARE) defined benefit scheme of USS (the Universities Superannuation Scheme). Since the promised benefit increases with inflation, the return on the pension portfolio is required to exceed the rate of inflation in order for the scheme to be fully funded. Therefore, given current low interest rates, the de-risking of replacing equities with bonds in the portfolio significantly increases the risk of under-funding and hence is prohibitively expensive. On the other hand, the risk of holding equities in the portfolio can be effectively mitigated through the principle of time diversification, thereby resulting in not only a high probability of a fully-funded scheme, but also possible lower contributions from both scheme sponsors and members in the future. Moreover, it is shown that a zero or negative real interest rate provides the condition for allocating all funds into equities if minimising the probability of underfunding is the sole objective. Finally, the paper finds that the promised benefit will be cheaper to fund if the pensioner has (i) made more years of contribution; (ii) has become a deferred member; (iii) has a slower wage growth; and (iv) has made the contribution earlier. The implication is that the current CARE scheme is cheaper and less risky than the final-salary scheme.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Cardiff Economics Working Papers ; No. E2018/22

Classification and Topics

• Classification: Wirtschaft
• Subject: pension ; defined benefit ; time diversification ; de-risking ; USS

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Wong, Woon K.
• Event: Veröffentlichung
• (who): Cardiff University, Cardiff Business School
• (where): Cardiff
• (when): 2018

Further information

• Handle: http://hdl.handle.net/10419/230428
• Last update: 10.03.2025, 11:43 AM CET