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Liquidity and Solvency in Pay-As-You-Go Defined Contribution Pension Schemes: A Continuous OLG Sustainability Framework.

Cepar Pensioners

Jennifer Alonso-García and Pierre Devolder

Notional Defined Contribution pension schemes are defined contribution plans which are pay-as-you-go financed. From a design viewpoint, the countries where NDCs have been implemented cannot guarantee sustainability due to the choice of notional return paid to the contributions and the indexation rate paid to pensions. We study how the scheme should be designed to achieve liquidity and solvency with a limited set of assumptions in a continuous overlapping generations model that increases traceability of the results. The adequacy and actuarial fairness are also jointly studied in the numerical example for the population of Belgium. We find that the proposed indexation and notional rate ensure sustainability and actuarial fairness. However, the effect on pension adequacy depends on the generosity of the scheme at retirement.