Should I Stay or Should I Go? Break Even Funding Ratios for DB Pension Plan Participants

The recent crisis has led to a large drop in funding ratios of many pension funds, which raises the question whether for a certain funding level the benefits of participating in the pension fund are outweighed by the disadvantages. For the benchmark case we find that the funding ratio needs to be very low, for almost all ages, to give agents motives to leave the pension fund and save via an individual DC scheme. Furthermore the break even funding ratios vary substantially with age and exhibit a U-shaped pattern over the life cycle. Hence relatively young and old cohorts have more incentives to leave the pension fund. However, the benefits of participating in the DB scheme, namely intergenerational solidarity, lower costs, and no conversion risk, are in most cases so high that even for low funding ratios individuals do not have an incentive to leave the fund.