TY  - JOUR
AU  - Maurer,Raimond
AU  - Mitchell,Olivia S.
AU  - Rogalla,Ralph
TI  - Managing Contribution and Capital Market Risk in a Funded Public Defined Benefit Plan: Impact of CVaR Cost Constraints
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14332
PY  - 2008
Y2  - September 2008
UR  - http://www.nber.org/papers/w14332
L1  - http://www.nber.org/papers/w14332.pdf
N1  - Author contact info:
Raimond Maurer
Finance Department
Goethe University
Grüneburgplatz 1 (Uni-PF. H 23)
Frankfurt am Main
Germany
E-Mail: rmaurer@wiwi.uni-frankfurt.de

Olivia S. Mitchell
University of Pennsylvania
Wharton School
3620 Locust Walk, St 3000 SH-DH
Philadelphia, PA 19104-6302
Tel: 215-898-0424
Fax: 215/898-0310
E-Mail: mitchelo@wharton.upenn.edu

Ralph Rogalla
Finance Department
Goethe University
Grüneburgplatz 1 (Uni-PF. H 23)
Frankfurt am Main
Germany
E-Mail: rogalla@wiwi.uni-frankfurt.de
AB  - Using a Monte Carlo framework, we analyze the risks and rewards of moving from an unfunded defined benefit pension system to a funded plan for German civil servants, allowing for alternative strategic contribution and investment patterns. In the process we integrate a Conditional Value at Risk (CVaR) restriction on overall plan costs into the pension manager's objective of controlling contribution rate volatility. After estimating the contribution rate that would fully fund future benefit promises for current and prospective employees, we identify the optimal contribution and investment strategy that minimizes contribution rate volatility while restricting worst-case plan costs. Finally, we analyze the time path of expected and worst-case contribution rates to assess the chances of reduced contribution rates for current and future generations. Our results show that moving toward a funded public pension system can be beneficial for both civil servants and taxpayers.
ER  -