Contracting-Out in the United Kingdom

Abstract

Contracting-out was introduced in the United Kingdom in 1978 as part of the arrangements for the State Earnings-Related Pension Scheme (SERPS) in order to avoid duplication with the existing well-developed defined benefit occupational pension plan sector. Members and sponsors of contracted-out schemes were able to save on their social security contributions in recognition of the fact that they were accruing equivalent benefits through an occupational pension plan. Later on this concept was extended to those with individual money purchase pension plans. This article considers a brief history of contracting-out, the principles of contracting-out, some problems associated with contracting-out, the implications of the introduction of stakeholder pensions and State Second Pension, and the latest rebate review and rebate orders. It examines how U.K. pensions policy since 1978 has been based on a partnership between social security and private pension plans.     

Social security reform ideas in Japan

Japan has a complex social security system. This article discusses the demographic and economic situation in Japan as background for understanding the setting in which the social security system functions. Japan has a three-pillar system for retirement income. The first pillar is the social security pension plan; the second pillar is the voluntary occupational pension plan; and the third pillar is personal savings, including the personal pension plan. The most important part of the retirement income system is the social security pension plan, which paid benefits accounting for 64% of the total income of elderly households in 1998. The five Employees' Pension Plans are established on a compulsory social insurance basis. Most large Japanese employers have a mandatory retirement age. Over 90% of all employees, including public sector ones, must retire from their career jobs at age 60.     

Social Security Reform Ideas in Japan

Abstract

Japan has a complex social security system. This article discusses the demographic and economic situation in Japan as background for understanding the setting in which the social security system functions. Japan has a three-pillar system for retirement income. The first pillar is the social security pension plan; the second pillar is the voluntary occupational pension plan; and the third pillar is personal savings, including the personal pension plan. The most important part of the retirement income system is the social security pension plan, which paid benefits accounting for 64% of the total income of elderly households in 1998. The five Employees' Pension Plans are established on a compulsory social insurance basis. Most large Japanese employers have a mandatory retirement age. Over 90% of all employees, including public sector ones, must retire from their career jobs at age 60.     

Changes in Firm Pension Policy: Trends Away from Traditional Defined Benefit Plans

In light of the recent concerns regarding the solvency of Social Security’s Old-Age, Survivors and Disability Insurance (OASDI), private pensions may play an increasingly important role in retirement welfare of US retirees. However, the private pension landscape has evolved in ways that may result in lower private pension wealth for retirees. One recent such phenomenon involves the conversion of traditional defined benefit pension plans to cash balance plans, which results in lower pension benefits for many workers. In this study, I investigated how characteristics of the firm’s workforce influenced whether the firm converted their traditional pension plan to a cash balance plan and how these characteristics related to the firm’s pension plan policy more generally. Using the Longitudinal Employer-Household Data and pension plan data from the Department of Labor/Internal Revenue Service and the Pension Benefit Guaranty Corporation, I found little evidence of workforce age distribution effects on the likelihood of DB plan conversion to a cash balance plan in the 1990s. More generally, I consistently found positive associations between firms with older and more female workforces and defined contribution plans during the same time.     

Old age pension reform in China's state-owned enterprises

The old-age pension scheme in China's state-owned enterprises (SOEs) is experiencing a difficult transition period; in the past, SOEs were responsible for providing retirees with pension benefits. However, in the 1980s and 1990s, the financial position of SOEs deteriorated, making it difficult for them to honor their social welfare commitments. The background of the current pension crisis is examined, and recent attempts to improve the funding of pensions in China's state-owned sector are reviewed, focusing on the period since the State Council issued its "Decision on the Establishment of Unified Pension Insurance" in 1997. The article concludes with a review of priorities for further reform.     

Questions and answers on employee benefit issues

This Issue Brief addresses 19 topics in the areas of pensions, health insurance, and other benefits. In addition to the topics listed below, the report includes data on the prevalence of benefits, tax incentives associated with benefits, lump-sum distributions, number of private pension plans, pension coverage rates, 401(k) plans, employer spending on group health insurance, self-insured health plans, employer initiatives to reduce health care costs, and employers' response to the retiree health benefits accounting rule, and flexible benefits plans. In 1992, U.S. employers (public and private) spent $629 billion for noncash benefits, representing nearly 18 percent of total compensation, excluding paid time off. In 1992, 71 percent of the 50.1 million individuals aged 55 and over received retirement benefits, including distributions from private and public pensions, annuities, individual retirement accounts, Keoghs, 401(k)s, and Social Security. Among the 76 percent of all private pension plan participants who participated in a single plan, 30 percent named a defined benefit plan as their pension plan type, 58 percent named a defined contribution plan as their pension plan type, and 12 percent did not know their plan type. Private and public pension funds held more than $4.6 trillion in assets at the end of 1993. The 1993 year-end assets are more than triple the asset level of 1983 (nominal terms). According to the Congressional Budget Office, U.S. expenditures on health care were expected to have reached $898 billion in 1993, up from $751.8 billion in 1991, an increase of 19.4 percent in nominal terms.     

PENSION SURVIVORS INSURANCE FOR WIDOWS

Men frequently do not provide pension survivors insurance for their wives. To analyze why, a demand-supply model of survivors insurance is presented. Using the Survey of Private Pension Benefit Amounts, Tobit estimates are calculated for a sample of married male pensioners. Social security reduces the survivors insurance provided through private pensions, partially foiling governmental attempts to reduce poverty among widows. The decline in inflation and the Supreme Court's unisex pension decisions have increased the selection of pension survivors insurance so that an increase could not necessarily be attributed to the passage of the Retirement Equity Act.     

Complementarity of pensions and training under multiemployer plans

We compare firmoptimizing and institutional models of labor contracts to investigate how different types of pension plans affect employee training. Unlike previous stud-ies, we consider an expanded voice model of training and pension coverage in which worker and union preferences feed back on firm decisions, and we test for this bidi-rectional causality between pensions and training. A standard view is that firms pro-vide pensions to optimize their training costs. However, when pension coverage is treated as endogenous in a twostage least squares regression (the data are merged 1991 CPS samples), pensions have a negative effect on training. In contrast, when the pension is a definedbenefit, multiemployer plan, training and pensions are comple-ments, consistent with both optimizing and institutional models. We are grateful for excellent research assistance from Michael Ash, Bhashkar Mazumder, and Judith Ruha and for suggestions from Dale Belman, David Card, B.J. Lee, David MacPherson, and John Turner.     

Warum es kaum Pensionsfonds in Deutschland gibt. Kapitalmarktrisiken,Finanzindustrie und die Politik der Mindestverzinsung

Studies of the rise of private defined-contribution pension plans have traditionally focused on social policy concerns about the allocation of risks and costs for beneficiaries and employers. There is however another dimension of pension privatization, which situates it in the context of financial markets and—more broadly—the economic system. Here, regulations forcing private pension providers to guarantee a minimum rate of return on individuals’ pension assets make a crucial difference for financial markets because they incentivize fund managers to invest a greater chunk of plan portfolios in fixed-income securities and therefore away from equities. While different segments of the financial industry have divergent preferences over minimum return guarantees, politicians are caught in a dilemma: Should they prioritize predictable benefit levels or the development of equity markets? Using the case of the introduction of the German Riester Rente, we argue that, as politicians linked the introduction of private defined-contribution plans with cuts in statutory pensions, insurance firms in coalition with trade unions insisted on minimum guarantees, thereby restricting the expansion of equity markets in Germany.     

Innenansichten eines Wohlfahrtsmarkts

The 2001 pension reform act (“Riester reform”) has recast old-age security in Germany by placing more emphasis on private provisions. The new policy draws on markets and competitive structures in social welfare, as done earlier in long-term care and in public utilities. In the social welfare sector in Germany, such privatisation mostly goes hand in hand with a far-reaching “social” regulation of markets. Old-age pensions are the most recent case in point. For the first time, financial markets figure as welfare markets. This is done in the politically most sensitive sector of the German welfare state, old-age security. In theoretical terms, we interpret the change as a structural transformation of German “social capitalism”. Empirically, we investigate the structure of the new welfare market and the attitudes of the providers, based on a survey of all providers of private pensions in Germany. The findings include: (1) Markets can produce the welfare good “income security in old-age” only by way of a complex arrangement of three markets – financial markets, pension markets and markets for financial consultancy services. (2) The pension reform of 2001 has given rise to a new welfare market: an old-age pension market as a distinct sub sector of the wider market for financial investment and saving. The pension market constitutes a new field of business, with new actors, new products and new arenas of competition. The new market is created and shaped by politics. (3) The new private pension market combines market principles with welfare state principles. The providers conceive of their business as contributing to social security, and they recognise that the state sustains and structures the market.     

Individual Pension Plans in Spain: How Expected Change in Future Income and Liquidity Constraints Shape the Behavior of Households

Understanding the motives that underlie Spaniards’ retirement saving decisions is important because many, if not most, future retirees will need to rely on personal savings to maintain a decent standard of living. The governor of the Bank of Spain has stated recently that the current public pension system will not guarantee an adequate pension to the citizens, advising to save now for retirement. In this debate on public pensions, and the complementary role that private pensions might play in Spain, this article has shed light on the decision of Spanish households to engage in individual pension plans and it has identified which factors determine the total amount saved in such retirement plans. Using micro data from the Bank of Spain (Survey of Household Finances 2011), the analysis has revealed that the expectations of lower future income, along with preferences for the financial risk and education, exert an important influence on the likelihood of enrolling in a private pension plan. University education minimizes the myopic behavior of households in the sense of making them more forward-looking and cautious in the face of their future well-being. Additionally using Heckman’s methodology to correct for the problem of selection bias, our results have revealed that liquidity constraints affect negatively the total amount of money saved for retirement.     

Employee preferences for pension plan features

Data from 517 survey respondents were used to analyze the determinants of the shares of a hypothetical $1,000 budget that employees were given to allocate to cash wages and pension plan features involving early retirement, postponed retirement, and infla-tion protection. Employee preferences for pension plan features generally reflected the potential for pensions to deal with such factors as risk sharing, family lifecycle decision making, and cash constraints, as those factors were related to observable per-sonal and demographic characteristics of employees as well as to their labor market circumstances and wealth embodied in their pension plans. Amongst other implica-tions, our analysis highlights that the demand is greater for early retirement and infla-tion protection than for postponed retirement, and the demand for early retirement is likely to increase as the work force ages, dual pension families become more promi-nent, and layoffs and job changing continue. Financial assistance from the Social Sciences and Humanities Research Council of Canada is gratefully acknowledged.     

Pensions and the uses of ignorance by unions and firms

Pensions are contingent claims contracts that are often fashioned by collective bargaining under conditions of asymmetric information and market power. Pensions are not an employer’s or a union’s optimal contract; they represent compromise. Employers use pensions to minimize labor costs and to adjust to market changes. Pensions help unions improve and protect their members’ work lives and help unions to survive as institutions. When workers’ estimations of their pensions differ from their employers’ estimations a moral hazard can exist. Less mobile workers and those with less influence subsidize the pension benefits of other workers or reduce an employer’s costs. Econometric results based on data from the President’s Commission on Pension Policy show that certain workers, namely women, overvalue their plans, which provides an opportunity to lower labor costs and redistribute benefits. Unions have a contradictory effect on information. The author thanks participants in the Cornell University Collective Bargaining workshop and the Harvard Labor Economics workshop. I especially thank James Medoff for his comments.     

EMPLOYEE EVALUATION OF PENSION CLAIMS AND THE IMPACT OF INDEXING INITIATIVES

There is discussion in both Canada and the United States of proposals which require private pension plans to provide indexed pension benefits. This paper employs both an auction and an implicit contract model to identify the compensating wage differentials required of possible policy initiatives. The contract model, motivated by the prevalence (especially in Canada) of ad hoc cost-of-living adjustments to pensions in pay, presumes that workers have a call option on the investment earnings in excess of the interest rate assumption used to value the plan. The analysis indicates that wage offsets are potentially quite large, may be difficult to predict, and may vary substantially across firms. In addition, the case for policy action would appear to rest largely on the implicit assumption that workers misperceive the value of their pension benefits.     

Czechoslovakia’s Interrupted Revolution

Russia’s transition to a market economy has been accompanied by serious, and in some ways unanticipated, disruptions of the existing social welfare system. The social policy dilemma has become a contentious issue in the national political arena. This paper examines the debate on the relationship between social welfare and democratization in post-communist Russia, exploring the case of pensions for the elderly. Although the causes of the pension crisis are complex and rooted in institutional difficulties, the state’s fiscal weakness alone does not explain the difficulties and controversies associated with Russia’s pension crisis. Analysis of the assumptions and principles of pension policy during the Soviet era and perestroika reveals that Russia today is caught between contradictory and competing discourses over citizens’ entitlement to pensions: Is an old-age pension to be considered a reward distributed by a prosperous society, or a basic and inviolable human right? Although the Russian government has used an argument that in effect makes pensions conditional on government resources, citizen and opposition protest has to some extent compelled the Russian government to be increasingly sensitive to demands for guaranteed pensions.     

Risk of disability pension in relation to gender and age in a Swedish county; a 12-year population based, prospective cohort study

Residents of the county of Osterg?tland, Sweden, who were 16-64 years of age in December 1984 and not pensioned (n=229,864), were followed in a prospective, cohort, study of data collected between 1985 and 1996. Using survival methods as the method of analysis, the likelihood of being granted a disability pension was 14% for women, 11% for men, and increased with age. Women less than 54 years of age were at higher risk than men (P<0.001), 69% of disability pensions granted were full-time and 31% were part-time, more women received part-time pensions (P<0.001). Whether the differences observed are due to gender bias in social insurance practices, to disease patterns, to occupational and work-related factors, or to a cohort effect has yet to be determined.     

Pension norms and pension reforms in Europe – the effects on gender pension gaps

Pension levels in the EU15 are significantly gendered. Various reforms to pension systems explicitly aim at improving women's opportunities to build up pension entitlements. These reforms differ from country to country. We see so-called work–life balance policies to increase women's labour market participation by facilitating part-time employment in particular as well as pension entitlements for care periods outside the labour market. At the same time, however, other seemingly gender neutral reforms generally tend to have the opposite effect. These measures include changes in pension calculation norms and pension composition, increasing the importance of non-public pensions. Therefore, future female pensioners will not be significantly better off. However, for women to be better off is necessary in times of pension retrenchments and individualization.

Based on recent life-course theories and studies, this article analyses the multiplicity of reasons for gender differentiated pension levels. It shows that the numerous direct and indirect pension determining factors related to life courses and welfare arrangements are interlinked on many fronts. Their cumulative effects finally result in (continued) significant gender gaps. It is argued that there are no quick fixes for reducing the gender gaps in pensions but that this will require attention to the degendering of labour market and the reformulation of life course norms.     

Demografische Alterung und Reformen der Alterssicherung in Europa – Probleme der ökonomischen,sozialen und politischen Nachhaltigkeit

Ageing is one of the long-term challenges for old age security in Europe, in particular for the intergenerational contract of pay-as-you go public pensions. The comparative macro-sociological analysis maps the demographic trends, political constraints, and social policy reform dynamics across Europe. Due to demographic ageing all European societies face long-term sustainability problems of their pension systems. Despite many reforms, European welfare states differ in the timing of retirement and the extent of pay-as-you-go public pensions. The comparison of ten European welfare states reveals the cross-national variations in reducing early retirement and in partially shifting to prefunded pensions. In addition to financial sustainability, the contribution also discusses other sustainability issues, particularly social inequality and political feasibility, which must be overcome in addition to the demographic challenge.     

The Pension Reform Process in France

The French old age security system was constructed progressively following the end of the Second World War in response to the pressing problem of old age poverty. In 1945 less than 40% of old people (4.5 million in total) had a pension. This was despite the existence of some pension systems dating back to the end of the nineteenth century and the beginning of the twentieth century. Monetary depreciation also meant that the pensions of those who enjoyed such benefits were very low. Historical factors explain the current pension system's organization and institutional division favouring pay-as-you-go schemes. While the French pension system has been largely successful in eliminating old age poverty, it today faces new challenges and constraints that make reform necessary. The debate as how best to reform the pension system is a long and winding one. Change is slow and incremental. Ideological, social and cultural factors and their interrelations help explain the difficulties in effecting reforms.     

The Effects of Vesting and Locking in Pension Assets on Participation in Employer-Sponsored Pension Plans

This study assesses whether pension vesting and lock-in regulations affect participation in employer-sponsored pension plans. Specifically, the effects of Canadian reforms enacted during the 1980s and 1990s are investigated, which reduced vesting and lock-in requirements from employees being at least 45 years old and having ten years of continuous plan membership to two years of membership irrespective of age. To credibly identify these effects, the analysis exploits inter-provincial variation in the timing of the pension reforms using a difference-in-differences approach. The results show that employees aged 25–54 responded positively to the added protection of their pension wealth by increasing plan participation, despite the general trend of declining occupational pension coverage during this time. However, these changes also crowded out contributions to other retirement savings accounts. The implications of these findings for the optimal design of private pension systems are discussed.