Assessing public pensions using risk measures: pay-as-you-go versus mixed schemes

Abstract

Pay-as-you-go (PAYG) pension systems are heavily affected by demographic risks. To mitigate the financial burden, mixed pension schemes that combine elements of funding and PAYG have been proposed. In this paper, we introduce a mixed scheme framework designed for a shrinking working-age population under a defined benefit scheme. We evaluate its performance using non-life risk measures such as the one-year ruin probability and the Value at Risk of the accumulated deficits over time. We also examine the implications of guaranteeing a return of zero on the investments within the funding component. Furthermore, we explore the creation of a buffer fund that invests part of the capital in the financial markets, thereby alleviating the financial pressures of the PAYG part. Our findings indicate that, while the proposed mixed framework does not hedge against demographic risk, it enhances the financial health of the system and delays the need for pension reforms as a result