'Pension fund governance: the intergenerational conflict over risk taking'

Abstract
This paper investigates the interplay of control rights and capital structure in pension funds. Retired participants have a debt-like claim on the fund, whereas active participants and employers have an equity-like claim. The value of the latter claim increases in risk taking whereas the value of the claim of retirees decreases when the pension fund engages in risky investments. This introduces an intergenerational conflict over risk taking.

From 1995 onwards, most funds increased risks. During the current credit-crisis retirees lost part of their pension claim, which has raised the question whether their interests are safeguarded. Among solutions are changes in the liability structure, ringfencing of retirees assets or handing over control rights to retirees by board representation.

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