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Many pension funds have a mismatch between assets and liabilities, taking more risks than securing liabilities implies. This puts fixed claims of retirees at risk. For the cases with and without macro-risk, this paper analyses the implications of this asset-liability mismatch for welfare, contribution policy and pension fund governance. The first result is that borrowing against human capital can be optimal if young workers are borrowing constrained. However, then contributions need be raised in case of underfunding. This implies that the ex ante risk level cannot be separated from the contribution policy expost. An optimal governance structure addresses this; otherwise a risk immunization policy -with the pension fund taking less risk- is second-best. In the presence of macro-risk it is not optimal to avoid losses for retirees. Optimal intergenerational risk sharing then implies retirees bear risks. The price and allocation of risk are determined endogenously with the result that losses are shared by higher contributions and lower pensions. This case applies in particular to large and nation-wide funds in a closed economies where the working participants coincide with tax-payers who underwrite "riskfree" government bonds.

Pension Fund Governance: The Intergenerational Conflict Over Risk and Contributions