Market value offers an attractive criterion to assess the intergenerational redistribu-
tioninpensionschemesasitisbasedonobservedpricesinfinancialmarkets. 3 Nosub-
jective assumptions with regards to the preferences of individuals are required. Such
subjective assumptions can be difficult to determine objectively, which can be partic-
ularly problematic in the situation where generations are involved in a divisive battle
overthedistributionofpensionshocks.Marketpricingalsoavoidssubjectiveassump-
tions on the valuation of risks. Unfortunately, this has a price too as the analysis has
to assume market completeness. Therefore it cannot deal with the price of non-traded
risks, and risks traded on imperfect markets. To illustrate, it may be hard to determine
thevalueofcashflowswithverylongmaturitiesbecausetradeinassetswithmaturities
beyond 30 years is limited. 4 An example of a non-traded risk is provided by aggregate
wagessincesomepensionpromisesarelinkedtoaggregatewages.Also,foraggregate
longevity risk no market prices are available in the absence of longevity bonds.
In principle, the method of market valuation could be extended to untraded risks
using alternative methods to obtain a ‘market consistent valuation’. This would how-
ever inevitably require arbitrary choices on the method and the empirical estimates.
The paradox is thus that pension schemes that complete markets by trading untraded
risk factors are difficult to value objectively, and may thus for this precise reason give
rise to intergenerational conflicts and political risks.
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