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.
Highlights
Defined benefit (DB) and defined contribution (DC) plans are two important types of private retirement plans in developed countries
For the power beneficiaries with higher risk aversion, the DC plan is preferred for values of π < π ∗, whereas for the LA and the DD beneficiary the DC plan is preferred for π < π ∗ since the optimal investment strategy is higher than the indifference parameter value
DC plans: salary risk present in both the defined benefit (DB) and DC plan, portability losses in DB plans due to job switching and asset price risk borne in DC plans
Summary
Portability, salary and asset price risk: A continuoustime expected utility comparison of DB and DC pension plans. Provided in Cooperation with: MDPI – Multidisciplinary Digital Publishing Institute, Basel. A continuous-time expected utility comparison of DB and DC pension plans, Risks, ISSN. 2227-9091, MDPI, Basel, Vol 3, Iss. 1, pp. Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen. Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Faculty of Mathematics and Economics, University of Ulm, Helmholtzstrasse 20, 89069 Ulm, Germany
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