Wharton Pension Research Council Working Papers
 

Title

Risk Transfer in Public Pension Plans

Document Type

Working Paper

Date of this Version

1-1-2002

Abstract

Actuaries and sponsors of public sector defined benefit pension plans agree that each generation of taxpayers should bear its fair share of the long term plan cost. Actuarial methods and assumptions are designed to equate expected costs across generations. This paper uses arbitrage principles to show that equating expected costs unfairly lowers risk-adjusted costs for early generations and raises them for later generations. The use of expected rather than risk-adjusted returns on risky assets leads to sub-optimal asset allocations, granting of valuable options (skim funds), and costly financing strategies such as Pension Obligation Bonds.

Comments

The published version of this Working Paper may be found in the 2003 publication: The Pension Challenge: Risk Transfers and Retirement Income Security.

Working Paper Number

WP2002-18

Copyright/Permission Statement

©2002 Pension Research Council of the Wharton School of the University of Pennsylvania. All Rights Reserved.

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Date Posted: 06 September 2019