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Defined Benefit Pension Schemes: A Welfare Analysis Of Risk Sharing And Labour Market Distortions

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Executive Summary

This CPB Discussion Paper addresses two policy questions with respect to public Defined Benefit (DB) pension schemes: Firstly, does a funded DB pension scheme increase welfare? In other words: do the gains from intergenerational sharing of capital market risks outweigh the labour market distortions from pension schemes? Secondly, how large is the commitment problem of pension funds after an adverse capital market shock? The answer to the first question depends on the used welfare measure. If the authors use risk-neutral weights to aggregate the equivalent variations of different generations in different states of nature then a DB pension scheme is welfare increasing.

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