Demographic risk indicators in pay-as-you-go pension funds

This paper deals with demographic risk in private pay-as-you-go pension systems. In particular, it analyzes the
financial sustainability of the fund in a stochastic framework. The authors present a model to investigate the dynamics
of these types of pension funds which operate according to the pay-as-you-go rule, focusing on the behavior
of the demographic variable “new entrants” and on its influence on the future evolution of the fund. The
global asset return and the new entrants variation rate are modelled by autoregressive processes. The goal is to
propose risk indicators that can be employed to monitor the solvency of the fund. A numerical application is
carried out using the data provided by the pension funds of Italian professional orders. The analysis highlights
how the variable “new entrants” influences the final value of the fund and the application shows that the proposed
controlling model appears effective at providing advance warning of the financial insolvency of the fund.