Collective adjustment of pension rights in ALM models

Collective adjustment of pension rights is a way to keep defined benefit systems tenable. In asset liability management (ALM) models presented in the literature these decisions are modeled both at the aggregate level of the liabilities as a whole and at a more detailed level. In this paper we compare the approximate aggregate approach to the accurate detailed approach for the average earnings scheme with conditional indexation. We prove that the aggregate approach leads to one‐sided errors. Moreover, we show that for semi‐realistic data these biases are considerable.