The ABCs of nonfinancial defined contribution (NDC) schemes

Nonfinancial defined contribution (NDC) pension schemes have been successfully implemented since the mid‐1990s in a number of European countries such as Italy, Latvia, Norway, Poland and Sweden. The NDC approach features the lifelong contribution–benefit link of a financial defined contribution (FDC) personal account scheme, but is based on the pay‐as‐you‐go (PAYG) format. At its start out, the PAYG commitments of the preceding defined benefit (DB) system are converted into individual personal accounts, allowing for a smooth transition from the DB to the DC format, while avoiding the very high transition costs inherent in a move from a traditional PAYG DB scheme to a fully funded FDC scheme. The NDC approach implemented by the rule book is able to manage the economic and demographic risks inherent to a pension scheme and, by design, creates financial sustainability. As in any pension scheme, the linchpin between financial stability and adequacy is the retirement age; in the NDC approach the individual retirement age above the minimum age is by design self‐selected and by incentives should increase the effective retirement age in line with population ageing. As a systemic reform approach NDC has become a strong competitor to piecemeal parametric reforms of traditional nonfinancial DB (NDB) schemes. While frequent, these reforms are far from transparent and usually too timid and too late to create financial sustainability while providing adequate pensions for the average contributor. This article offers a largely non‐technical introduction to NDC schemes, their basic elements and advantages over NDB schemes, the key technical frontiers of the approach, and the experiences of NDC countries.     

A “Swedish” actuarial balance for a notional defined contribution pension scheme with disability and minimum pension benefits

This article proposes a “Swedish” type actuarial balance sheet (ABS) for a notional defined contribution (NDC) scheme with disability and minimum pension benefits. The proposed ABS splits the pension system in two parts: the pure NDC part and the redistributive part, which includes the assets and liabilities originating from non‐contributory rights. The article contains a numerical example that sheds light on the real applicability of our proposal. The model has practical implications that could be of interest to policy‐makers, given that it integrates actuarial and social aspects of public pensions and discloses the real cost of redistribution through minimum pensions.     

A comparative study of the relationship between pension plans and individual savings in Asian countries from an institutional point of view

Hur MH. A comparative study of the relationship between pension plans and individual savings in Asian countries from an institutional point of view Int J Soc Welfare 2010: 19: 379–389 © 2009 The Author, Journal compilation © 2009 Blackwell Publishing Ltd and the International Journal of Social Welfare. This study identifies various saving plans used as alternative pension plans in Asian countries and examines the extent to which these saving plans contribute to their pension schemes. Data were collected from six Asian countries: China, Hong Kong, Japan, Korea, Singapore and Taiwan. The comparison concentrates on an examination of differences and similarities in individual countries' privately managed pension schemes and saving plans. This study suggests that a pension system does not have to be a privately managed plan to encourage individual savings. A critical point for individual savings was avoiding a defined benefit plan. On the basis of these findings, a typology of relationships between second and third pillars and provident funds and incentive systems for individual savings was developed.     

Pension financialization and collective risk sharing in Canada and Finland

This article contributes to the debate concerning pension financialization and how countries are adapting their pension systems to respond to demographic ageing. We do so by examining the statutory pension systems of Canada and Finland, which diverge interestingly from current international trends. The Canadian and Finnish public pension schemes reflect two tendencies often associated with pension financialization: an increasing reliance on financial markets and an investment policy with a diversified asset allocation. However, unlike in many other countries, this has not resulted in heightened individual risks in old-age income security caused by a shift from defined benefit to defined contribution pensions – an otherwise common trend internationally.     

A comparative analysis of pension reforms and challenges in Ghana and Nigeria

Ghana and Nigeria recently joined a number of countries that have incorporated fully‐funded defined contribution pension programmes into their national social security arrangements. Contemporary analyses of pension reforms, however, continue to focus on middle‐income countries in Latin America and Central and Eastern Europe, as well as on Member States of the Organisation for Economic Co‐operation and Development, thereby marginalizing recent pension policy reforms in sub‐Saharan African countries. This article examines the complete and partial shifts to defined contribution pension programmes in Nigeria and Ghana respectively, and points to a number of contextual and contingency factors that challenge the use of defined contribution schemes as a means to address problems of benefit adequacy in the sub‐Saharan African context.     

Developing countries and systemic pension reforms: Reflections on some emerging problems

Since 1981 close to forty countries have introduced systemic pension reforms that have replaced all or part of prior pay‐as‐you‐go (PAYG) schemes with privately managed funded defined contribution (FDC) pillars or systems. However, over the past decade about half of these countries have subsequently cutback on, or entirely eliminated, these FDC schemes. In this article we explore some of the reasons why this reversal is often taking place in developing countries. As part of our analysis we propose a new pension reform typology that goes beyond the commonly used dichotomy between PAYG and pension privatization. We identify and discuss four factors that are of particular relevance to those seeking to understand the pension policy reversals that have been taking place in many developing countries: low pension coverage and incentive incompatibility, triple burden costs, tradeoffs between pension reforms and social pensions, and difficulties with annuitization.     

The Current Situation of Retirement Income Provisions in Japan: Social Security Pension Schemes and Corporate Pension Plans

Japan has been faced with rapid population ageing for decades. This has continuously reduced the level of social security pension benefits. Based on this it is often said that corporate pension plans should play a wider role forward in providing retirement benefits. However, we also have to know that there is a limit to what corporate pension plans can do in place of the social security pension schemes. In this paper we extract lessons from the history of social security pension schemes in our country and try to define the roles of corporate pension plans and social security pension schemes. In conclusion we should keep adequacy of social security pension benefits even if the contribution rate becomes a bit higher. Corporate pension plans just enrich people's life in retirement. We have to remember that corporate pension plans were not certain means for reducing the poverty in old age and that for this reason social security pension schemes by social insurance were invented.     

The effects on intra‐generational inequality of introducing a funded pension scheme: A microsimulation analysis for Estonia

This article uses a single male cohort microsimulation model to analyse the intra‐generational and distributional effects of a shift in Estonia from a defined benefit pay‐as‐you‐go (PAYG) pension system to a multi‐pillared system with a PAYG scheme with contribution‐based insurance components and a funded pension scheme. We contribute to the literature on microsimulation by showing how introducing contribution‐based insurance components and compulsory defined contribution (DC) schemes can increase pension inequality. Our results show that in the case of a high level of inequality in labour earnings and high long‐term unemployment rates, such as in Estonia, the introduction of a very strong link between contributions and future benefits leads to considerably higher inequality in pension incomes as measured by the Gini coefficient. Simulation results for Estonia suggest that inequality in old‐age pension incomes more than doubles when the reforms mature. In contrast, the inequality in replacement rates decreases.     

Assessing the pension reform potential of a notional defined contribution pillar

Abstract As some of the limitations of the traditional pay‐as‐you‐go defined benefit public pension model have become more evident in recent years, pension experts have begun searching for alternative models. The notional defined contribution model, also financed on a pay‐as‐you‐go basis, has emerged as one of the major new approaches. Drawing on evidence from schemes in six countries (Sweden, Italy, Poland, Latvia, Kyrgystan and Mongolia), this article aims to describe the notional defined contribution model and to review its strengths and limitations relative to the major alternatives, the pay‐as‐you‐go defined benefit model and the funded defined contribution model. A four‐pillar pension model is proposed.     

Pension scheme fees and charge ratios in 44 countries: A comparative study

Based on data received from pension supervisory authorities, the article reviews 85 different pension schemes in 44 jurisdictions by looking at fees and charges as well as their legal ceilings and their development since 2014. A key finding is the observed decrease in fees and caps. The article presents jurisdictions according to clusters, i.e. by groups of countries with identical or very similar items already covered by pension fees, and analyses the extent to which various cost and fee elements are covered by fees charged to members. Finally, we calculate charge ratios for each cluster to quantify the impact of fees and charges on pension savings. Occupational defined contribution pension schemes and personal plans linked to employment tend to be much more cost effective than personal schemes that have no direct employment link.     

Implicit debt in public‐sector pension plans: An international comparison

Most countries have separate pension plans for public‐sector employees. The future fiscal burden of these plans can be substantial as the government usually is the largest employer, pension promises in the public sector tend to be relatively generous, and future payments have to be paid out directly from government revenues (pay‐as‐you‐go) or by funded plans (pension funds) which tend to be underfunded. The valuation and disclosure of these promises in some countries lacks transparency, which may hide potentially huge fiscal liabilities to be passed on to future generations of workers. In order to arrive at a fair comparison between countries regarding the fiscal burden of their public‐sector pension plans, this article recommends that unfunded pension liabilities should be measured and reported according to a standard approach for reasons of fiscal transparency and better policy‐making. From a sample of Member countries of the Organisation for Economic Co‐operation and Development, the size of the net unfunded liabilities as of the end of 2008 is estimated in fair value terms. This fiscal burden can also be interpreted as the implicit pension debt in fair value terms.     

On welfare effects of increasing retirement age

We develop an OLG model with realistic assumptions about longevity to analyze the welfare effects of raising the retirement age. We look at a scenario where an economy has a pay-as-you-go defined benefit scheme and compare it to a scenario with defined contribution schemes (funded or notional). We show that, initially, in both types of pension system schemes the majority of welfare effects comes from adjustments in taxes and/or prices. After the transition period, welfare effects are predominantly generated by the preference for smoothing inherent in many widely used models. We also show that although incentives differ between defined benefit and defined contribution systems, the welfare effects are of comparable magnitude under both schemes. We provide an explanation for this counter-intuitive result.     

Can complementary pension plans help improve retirement income in the Dominican Republic?

In the 1990s, following the earlier example of Chile, pension system reforms were implemented in a number of Latin American and other countries. These reforms focused on introducing models of pension provision that were fully‐funded and privately managed. Although aspects of these reforms have been positive, for many persons covered by these systems retirement income is not adequate. The development of occupational pension plans may offer an alternative, complementary mechanism to help improve pension adequacy. This article discusses different complementary pension plan models and examines the case of the Dominican Republic. It argues that complementary occupational pension plans may be a viable policy option for this developing country.     

Notional defined-contribution schemes: Old wine in new bottles?

Until recently, most pension benefit formulae in social security schemes resembled each other. They were all defined-benefit formulae that were either generous or mean, while defined-contribution formulae were exclusively used in private and occupational pension schemes and some national provident funds. Then came the mandatory retirement savings model, introduced in Chile and subsequently in other Latin American countries. It did not seem possible that such a formula could be used on any large scale in the pay-as-you-go environment of OECD pension schemes. In the early 1990s, however, Swedish social security experts devised the notional defined-contribution (NDC) system: individual social insurance pension contribution records are converted into a fictitious savings amount at retirement, whereupon the defined-contribution approach is followed. This article analyses how much of this approach is new. The conclusion is that it is a novel pension policy instrument rather than a new type of pension formula, and most of its potential financial and distributive effects could also be achieved by a classical, linear defined-benefit formula. It is the packaging that differs and, in politics, that often is what matters.     

The old‐age pension law in Mexico: The promise of poverty in old age?

In 1997, Mexico replaced its main old‐age pension system with an individual capitalization system. In 2021, the first people subject to the new system will retire. Using a model that projects demographic and labour variables and using Monte Carlo simulations, the findings of this study show that in 2051 the percentage of men not having a pension will increase from 38 per cent to 59 per cent, and that of women from 44 per cent to 66 per cent. The replacement rate for the average Mexican worker will fall from 70 per cent to 30 per cent. The numbers of people in extreme poverty will increase by almost 2.8 million, representing 9.44 per cent of the population. Alternative scenarios are proposed that involve increasing the contribution rate and raising the retirement age.     

Poverty Reduction: The Missing Piece of Pension Reform in Latin America

Employment‐based pension plans constitute the main form of pension provision in Latin America. Although recent pension reform in the region has focused on strengthening these, old‐age poverty remains high in most countries in the region, with older people over‐represented among the poor. The article argues that ensuring old‐age support for poor and vulnerable groups involves a different set of priorities and options for pension reform, namely a strong focus on tax‐financed public cash transfer programmes. Cash transfer programmes focused on poor older people are the missing piece of pension reform in the region. The article examines the experience of the handful of countries with such programmes in place, and draws the lessons for the future of social policy in the region.     

From Austerity to Austerity: The Political Economy of Public Pension Reforms in Romania and Bulgaria

This article discusses the trajectories of pension system reforms in two of the latecomers to the EU: Bulgaria and Romania. It finds that over the past two decades, the two countries pursued increasingly dissimilar public pension reforms for managing their respective public pay‐as‐you‐go pension systems. Using a political institutionalist theoretical framework, I argue that the divergence between the two cases is attributable to multiple factors. First, different temporary political compromises between national and international actors generated reforms that retrenched public pensions and introduced mandatory private accounts. Second, pension reforms often had unintended consequences that limited their intended impact. Third, incremental adjustments introduced by governments in response to political pressures caused alternating phases of austerity and generosity that catered to different constituencies in each country. In Romania, reform outcomes amounted to a moderately generous pension system, financed through relatively high contribution rates with a small funded component, while in the case of Bulgaria, the pension system evolved into a meagre programme, financed through low contribution rates and a larger private pillar.     

Extending access to contributory pensions: The case of Uruguay

Since the 1980s, many Latin American countries have tightened access to contributory pensions, with financial sustainability being a main concern. Studies suggest that a sizable share of contributors would not be able to comply with stricter access conditions, since observed contribution densities were low. While most Latin American countries lack complete work history records, the observed density of contributions offered strong evidence of short contribution histories, in particular for low‐income workers and women. In the last decade these facts drove a new wave of reforms, in the form of less demanding eligibility requirements to access pensions and the need for a gender perspective. Uruguay took part in both processes, increasing vesting period conditions in 1996, then lowering them and granting childcare credits in 2008. In this article, we analyse the effects that less strict eligibility requirements would have on pension entitlements in Uruguay, estimating complete contribution histories using administrative records. Work history records have been kept since April 1996 only, meaning there are still no complete work histories. The study finds that pension rights would increase, in particular for women. The main effect would be driven by the lower contribution requirement. In addition, childcare credits would further reduce the gender gap in terms of access to benefits. The case of Uruguay is relevant in the regional context, as most Latin American countries are ageing rapidly and can learn from the Uruguayan experience, a country with vital statistics closer to those of developed countries. Also, recent reforms in the region show shared concerns on pension rights and the gender gap.     

When Do Benevolent Capitalists Change Their Mind? Explaining the Retrenchment of Defined‐benefit Pensions in Britain

This paper explores the politics of welfare retrenchment, but differs from much of the current literature in this area by focusing not on the decisions of politicians but those of private sector employers. In countries with a large private welfare sector, employers are major social policy players with a significant influence on the generosity of welfare provision, but the rationale behind their actions is not well understood. To explore these issues, a case study is used of the recent fundamental change in UK occupational pension provision, involving a rapid shift from defined‐benefit to defined‐contribution pensions. The paper shows by means of a micro‐simulation of the relative performance of defined‐benefit, defined‐contribution and state pensions that this shift represents a significant retrenchment. It suggests, using historical material, interview data and insights from behavioural economics, that existing explanations for this change, while valuable, have important gaps because they are based on too narrow a conceptualization of business motives. In this regard, the paper highlights the importance of herd behaviour.