Linear risk sharing in intergenerational pension

We introduce and analyze a novel collective defined contribution plan (CDC) that guarantees at least a target benefit as a lump sum upon retirement. The guarantee is provided by the remaining working generations under a pre-determined linear intergenerational risk sharing (IRS) rule. Through a simulation-based study, we show that the CDC scheme consistently outperforms the comparable individual DC scheme (IDC) in terms of risk-adjusted performance. An extensive sensitivity analysis indicates that this outperformance is robust, especially in a ‘double-hit’ scenario where the underlying market dynamics and the demographics are severely worse than expected. Our work indicates that guaranteed retirement benefits can be organized via a CDC scheme with IRS in a way that it is, first, beneficial for all generations to join and, second, resilient against demographic change.