Lu Yi

Quantifying intergenerational equity under different target benefit plan designs

In this research, we investigate the value of inter-generational transfers under various target benefit plan designs. The contingent retirement benefits are decomposed into embedded options, and the risk-adjusted values of these options are calculated and compared across generations. For this purpose, an economic scenario generator is implemented: the economic variables’ dynamics are generated by a model that combines the first-order vector autoregressive model and the generalized autoregressive conditional heteroscedasticity process. A corresponding risk-neutral model is derived and estimated using the prices of financial assets; the latter is helpful to price the embedded options. Without additional source of funding, we show that less volatile contributions and retirement benefits can only be achieved by increasing inter-generational subsidization.

Keywords: Target Benefit Plans; Inter-generational Equity; Asset Liability Management; Economic Scenario Generator; Multivariate Time Series; Stochastic Simulation; Risk-Neutral Pricing