We compute minimum funding ratios for Defined Benefit (DB) plans based on the expected utility that can be achieved in a Defined Contribution (DC) pension scheme. Using Monte Carlo simulation, expected utility is computed for three different specifications of utility: power utility, meanshortfall and meandownside deviation. Depending on risk aversion and the level of sophistication assumed for the DCscheme, minimum acceptable funding ratios are between 0.87 and 1.20. If the DCscheme is constrained to a fixedcontribution setup, minimum funding ratios are between 0.87 and 0.98. Furthermore, the attractiveness of the DB plan increases with the expected equity premium and the fraction invested in stocks. We conclude that the expected value of intergenerational solidarity, implicit in the DB pension fund, can be large. Given a pension fund with a funding ratio of 1.30, a participant in a DC plan has to pay a 2.7 to 6.1%point higher contribution to achieve equal expected utility. Keywords: definedbenefit pension fund, individual efficiency, definedcontribution
180  Minimum Funding Ratios for DefinedBenefit Pension Funds
 DNB Working Papers

Date 23 September 2008