Abstract
We study risk sharing between generations for a variety of realistic collective funded pension schemes, where pension benefits and contributions may depend on the funding ratio and the asset returns. The collective pension schemes organizing intergenerational risk sharing are optimized with respect to generosity of pension benefits, asset allocation and risk allocation rules. Using contingent claims valuation method, we calculate the market value of the transfers between generations. We perform a welfare comparison between the collective plans with intergenerational risk sharing and the optimal individual benchmark. We show that well-structured intergenerational risk sharing is a zero-sum game in market value terms, but can be welfare-enhancing vis-a-vis the benchmark. The expected welfare for the future entering generations is higher than for the current entry generation. Even initially underfunded collective funds may provide higher utilities than the optimal individual benchmark, provided that the initial underfunding is not too severe.
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