The value and risk of intergenerational risk sharing

Meerwaarde van intergenerationele risicodeling

This brief note discusses the value and risk of Intergenerational Risk Sharing in a very simple setting. It mainly serves to explain where value and risk of IGR in current Dutch pension contracts comes from. More complicated settings will lead to different numerical results, but conceptually these are the same. Part of the Dutch discussion also refers to so-called “borrowing constraints”. At a young age, pension participants may actually want to invest more in stocks than the wealth they have at that time. This is very similar to the notion of IGR we discuss here: a specific pension contract may lead to exposure to risky returns that lead to an increase in utility. Within the Dutch setting, choosing optimal exposures and discussing in what institutional settings these are most easily obtained probably deserves more attention. This paper is accompanied by an Excel sheet that implements the formulas. The reader is invited to consider several concrete parameter settings and to check the sensitivity of the risk and value of IGR for various parameter configurations.

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