Impact of Replacing a Defined Benefit Pension with a Defined Contribution Plan or a Cash Balance Plan

Abstract

Four pension plan conversions are examined to determine the impact on retirement benefits of workers. The study was based on interviews with top management, employee surveys, and actuarial analysis of retirement benefits under the old and new pension plans. In general, workers who leave the firm prior to the age of early retirement can expect increased benefits under the new defined contribution and cash balance plans, whereas older, more senior workers can expect to accrue smaller benefits after the plan conversions. Recognizing these potential adverse effects, the employers in our studies provided various types of transition benefits to existing workers or gave employees the choice of remaining in the old defined benefit plan. Employee surveys reveal that younger workers are more supportive of the new pension plans than are older workers. These case studies also indicate that communication by managements with their employees is very important to the successful implementation of plan conversions.     

Financial literacy and voluntary savings for retirement: novel causal evidence

ABSTRACT

We utilise recent Household Finance and Consumption Survey microdata to report first causal effects of financial literacy on voluntary private pension schemes participation for a Central and Eastern European (CEE) country, namely Slovakia. Savings for retirement in the supplementary pension schemes are positively associated with financial literacy after controlling for a set of relevant socio-economic variables. One additional correctly answered financial literacy question leads to a 5.6 percentage points increase in the probability of having a voluntary pension savings plan in our ordinary least squares estimates. The causal impact of financial literacy increases to 19.5 percentage points when we address potential endogeneity problems by novel to the literature instrumental variables.     

The Impact of DC Pension Systems on Population Dynamics

Abstract

This study investigates the risk inherent in defined contribution (DC) pension plans on an individual and aggregate basis, based on U.S. data. Our aim is to gain insight into the consequences of a DC pension scheme becoming the predominant pillar of retirement income for an entire society. Using the stochastic simulated output of a DC flexible age-of-retirement model, we first determine the optimal investment strategies. We then examine the demographic retirement dynamics of an entire population of DC pension plan participants.

We observe that even for the most risk-averse plan members there is a high level of uncertainty in an individual’s age at retirement. At the aggregate population level, we find that this uncertainty does not get dampened to any great extent by a diversification effect. Instead, the central role played by the market in determining retirement dates results in significant variation in the dependency ratio (the ratio of retirees to workers) over time. In addition, an attempt to ameliorate the outcome by introducing additional realistic features in the DC population modeling did little to dampen this volatility, which suggests that countries dominated by DC schemes of this type may, over time, be exposed to significant risk in the size of its labor force.     

The Public Responsibility of Actuaries in American Pensions

Abstract

This article traces the history of the public responsibility of actuaries concerning American pension plans. It includes both defined-benefit and defined-contribution plans for employees of both private and public employers. It does not include Social Security. Actuaries have provided innovative approaches to plan design, funding, funding instruments, accounting, and legal and regulatory requirements. Actuaries have made substantial contributions that have enabled pension plans, together with Social Security, to provide economic security for millions of workers and their dependents when employment ends. However, many Americans still lack assurance of a retirement income that is initially adequate, continues for life, and keeps pace with inflation. Thus, challenges will continue to face pension actuaries in the years ahead.     

Making Federal Pension Policy Work

Abstract

Millions of Americans retire while they are still productive. Of these, many will have the resources to enjoy all of their golden years. Unfortunately, many others will face economic hardships after they have exhausted their own resources but have become too frail to return to work. Part of the problem is that the current pension system is fraught with financial incentives that push ablebodied elderly workers into retirement just when they should instead be encouraged to remain in the workforce to accumulate additional retirement assets. This paper recommends a number of ways to change federal pension laws in order to encourage elderly workers to remain in the workforce. For example, this paper recommends toughening the penalty on premature distributions, repealing the minimum distribution rules, and repealing the exceptions to the Age Discrimination in Employment Act that permit retirement plans to provide early retirement incentives and subsidies.

This paper also considers whether the government should require that all retirement plans be neutral as to the timing of retirement. In an age-neutral world, workers would always accrue more benefits if they kept working. Consequently, more workers would remain in the workforce, accumulating additional assets for their eventual retirement.

Finally, this paper also considers how federal pension policy could help counteract the tendency of Americans to retire too early because they underestimate their life expectancies, overestimate their financial resources, and fail to understand the deleterious effects of inflation. In particular, this paper recommends that the government require that virtually all retirement plans pay at least a portion of their benefits in the form of an inflation-adjusted annuity.     

Public pensions and labor supply over the life cycle

In order to remain fiscally solvent, governments of many countries have reformed their public pension schemes to encourage labor supply at older ages. These reforms include reductions in the generosity of public pensions and reduced penalties for working past the normal retirement age. In this paper, we consider how reforms to public pension systems affect labor supply over the life cycle. We put the recent empirical evidence on the effect of government pensions on labor supply in a life cycle context, and we present evidence on the effectiveness of tax reforms for stimulating labor supply over the life cycle. Our main conclusion is that the labor supply of older workers is responsive to changes in retirement incentives. The labor supply of younger workers is less responsive. Thus the trend towards lower taxes on older workers in many developed countries should continue to fuel their trend towards later retirement.     

Defined Benefit or Defined Contribution? A Study of Pension Choices

We solve an empirically parameterized life‐cycle model of consumption and pension choices to show how expected earnings growth and risk affect the benefits of final‐salary defined benefit (DB) pension plans, relative to pension plans that are defined contribution (DC) in nature. We use micro data on the pension choices of individuals to provide evidence consistent with the model predictions: (1) individuals who expect a higher growth rate of earnings are more likely to choose DB final‐salary schemes, and (2) individuals who face a higher variance of persistent income shocks are less likely to choose DB final‐salary schemes. We control for cohort and age fixed effects in the empirical analysis.     

Supplementary Pension Coverage in Britain

The 1986 Social Security Act introduced far-reaching changes to the supplementary pension environment in Britain, encouraging the growth of defined contribution pension plans and especially personal pensions. This paper examines the pattern of supplementary pension coverage of employees in Britain five years after the implementation of the Act, using cross-sectional data from the Family Resources Survey 1993–94. Two-thirds of employees in Britain are covered by private contracted-out pension scheme. Employer-provided defined benefit pension schemes remain the dominant type of supplementary pension scheme. The growth of personal pension plans is more marked among manual, less-skilled, workers in smaller establishments. The paper concludes that, in the absence of further pension reform, adverse labour market conditions will exert downward pressure on private pension coverage. JEL classification:I38, J32, J38.     

Pension Funds and the U.K. Economy

Abstract

The paper considers the impact of U.K. defined benefit (DB) pension plan unding and investment on the U.K. economy. It suggests that many conventional theories are based on incomplete or inconsistent economics. In particular, the author suggests that:

? An economy cannot really gain competitive advantage from high returns on the domestic assets in which pension funds invest.

? DB liabilities are essentially similar for most schemes and can be closely matched with bonds.

? Funding pension liabilities has no primary impact on individuals’ consumption and saving or on firms’ capital investment.

? Pension funds are not natural investors in the equity of new ventures.

The conclusion of the paper is that the most significant impact of pension funds on the U.K. economy relates to the costs imposed by extreme mismatching between their financial assets and liabilities. The author argues that such risks can, in essence, “crowd out” entrepreneurial risk. He asserts that the U.K. economy would gain from greater focus on the matching of these assets and liabilities, and that the best way to stimulate enterprise is by eliminating the frictional costs in the economy arising from current practices.     

Corporate reporting implication in migrating from defined benefit to defined contribution pension schemes: A focus on the UK

Pensions are intricately linked to employees’ well-being in the latter part of their life and during their working life in that they provide a sense of financial security in retirement. Since the 1980s, pension schemes have changed both in concept and detail with significant consequences for beneficiaries. This paper explores one of the major changes: the migration from defined benefit (DB) to defined contribution (DC) pension schemes focusing on this change's interface with accounting. In exploring this shift from DB to DC schemes, the paper uses a critical perspective to reflect on this interface including how the change is accounted for in corporate reporting narrative. The key focus is on issues of political economy: it is found in this respect that while wealth is effectively distributed from pension holders efforts are made to legitimise or displace attention from pension changes. An analysis of narratives of corporate annual reports is undertaken to critically explore corporate communication to stakeholders vis-à-vis pension scheme changes. Findings suggest limited and problematic engagement with employees as per the corporate annual report narrative. We also point to a lack of appetite on the part of existing employees to engage employers on these changes. The change is framed to give workers an impression that they are taking responsibility for their future whilst an alternative view is that in actuality the organisation is decoupling from pension responsibility and devolving associated risks to employees for greater profitability. Counter accounting may be a way forward.     

Participation in Workplace Pension Schemes and the Effect of Provision: Evidence from the United Kingdom*

This study investigates the effect of public policies enforcing workplace pension plan provision on participation rates. Using British data covering almost two decades (1992–2009), I identify the potential opt‐in rate among private sector workers who have not been offered a workplace pension plan, had they been offered the opportunity to join such a saving scheme. I find that universal provision of workplace pension schemes alone could generate a major impact on pension coverage.     

新生代农民工养老保险参与意愿及影响因素——基于安徽省调查数据

摘要：文章从理性选择理论出发,建立养老保险参与意愿模型,运用Tobit模型和安徽省微观调查数据研究了新生代农民工养老保险参与意愿及影响因素。研究发现,新生代农民工参与意愿较高,实际参与率较低;性别与婚姻对新生代农民工养老保险参与有显著影响,文化程度与年龄对新生代农民工养老保险参与没有显著影响;新生代农民工养老保险参与意愿概率不仅仅是其经济理性体现,更重要的是其非经济理性行为的体现,这些非经济理性变量对新生代农民工养老保险参与概率与数量都有非常显著的正向影响。     

Human Survival at Older Ages and the Implications for Longevity Bond Pricing

Abstract

Governments are concerned about the future of pension plans, for which increasing longevity is judged to be an important risk to their future viability. We focus on human survival at age 65, the starting age point for many pension products. Using a simple model, we link basic measures of life expectancy to the shape of the human survival function and consider its various forms. The model is then used as the basis for investigating actual survival in England and Wales. We find that life expectancy is increasing at a faster rate than at any time in history, with no evidence of this trend slowing or any upper age limit. With interest growing in the use of longevity bonds as a way to transfer longevity risks from pension providers to the capital markets, we seek to understand how longevity drift affects pension liabilities based on mortality rates at the point of annuitization, versus what actually happens as a cohort ages. The main findings are that longevity bonds are an effective hedge against longevity risk; however, it is not only the oldest old that are driving risk, but also more 65-year-olds reaching less extreme ages such as 80. In addition, we find that the possibility of future inflation and interest rates could be as an important a risk to annuities as longevity itself.     

Issues for Implementing Phased Retirement in Defined Benefit Plans

Abstract

U.S. society is aging. The nature of work has changed from work that requires physical strength to work based on knowledge. As a result, workers are beginning to phase into retirement rather than going directly from full-time work to full retirement. From a retirement income perspective, many final-average-pay defined benefit plans have features that make phased retirement difficult at best and detrimental at worst. U.S. pension law and regulations present barriers to phased retirement if the phased retiree wants to receive a portion of available pension benefits during phased retirement.

This paper examines private sector options to encourage phased retirement and to eliminate the disincentives that currently affect defined benefit plans. It offers alternative calculations of final average pay that do not penalize the part-time worker. It also demonstrates that the plan’s early retirement reduction and late retirement increase can be set to maintain actuarial equity throughout phased retirement. The paper presents benefit calculations with equal actuarial values for various payout patterns.

The paper discusses the coordination between phased retirement and subsidized early retirement. Finally, the paper notes some of the changes in ERISA that will be needed to facilitate phased retirement in defined benefit plans, especially for participants who want to receive pension distributions while working part time.     

New danish bases of calculation in life and pension insurance

Abstract

A committee consisting of actuaries representing private life offices, private pension offices, and Statsanstalten for Livsforsikring (The State Life Insurance Institution) transacting both life and pension business, have compiled a complete set of calculation bases, which have been adopted by all Danish life and pension offices with effect as from January 1, 1966.     

Social Transfers And Income Inequality In Old Age

Abstract

This paper examines variation in old-age income inequality between industrialized nations with modern welfare systems. The analysis of income inequality across countries with different retirement income systems provides a perspective on public pension policy choices and designs and their distributional implications. Because of the progressive nature of public pension programs, we hypothesize that there is an inverse relationship between the quality of public pension benefits and old-age income inequality—that is, countries with comprehensive, universal, and generous public pension systems will exhibit more equal distributions of income in old age.

Luxembourg Income Study data indeed show that cross-national variation in old-age income inequality is partly explained by differences in the percentage of seniors’ total income derived from public pension transfers. Sweden, for example, has the highest level of government transfers and the lowest level of old-age income inequality, while Israel and the United States have the lowest levels of dependency on government transfers and the highest levels of income inequality. A notable exception is Canada, where public transfers represent only a moderate portion of elderly income, yet old-age income inequality is relatively low. These findings suggest that quality of public pension benefits does indeed play a role in explaining differences in old-age income inequality between industrialized nations, yet these variations are also likely influenced by other factors.     

论我国养老保险逃费的危害、原因和治理

养老保险基金主要由劳动者和企事业单位缴费形成,它是养老保险制度赖以建立的基础。养老保险逃费对这一基础起着极大的破坏作用。调查研究结果表明,我国的养老保险逃费问题比较突出,相当一部分应缴费单位和个人都存在逃费现象,逃费形式花样百出,它直接影响养老保险制度的正常运行和发展。逃费是经济发展水平和劳动者的收入状况、养老保险主体行为和养老保险制度本身多种因素共同作用的结果。克服养老保险逃费需要从多方面着手:努力发展经济,不断提高劳动者收入;改革养老保险管理制度;充分调动企业参加养老保险的积极性;提高劳动者参加养老保险的积极性;强化各级政府的责任;加强养老保险管理部门的责任。     

The Earnings Implications of Pension Expense

Abstract

Recent challenges to the actuarial pension model and a movement to harmonize international accounting standards both suggest that the current Canadian standards for pension accounting, CICA 3461, may see substantial revision during upcoming years. To understand better the implications of these possible accounting changes, this paper presents the results of a stochastic analysis that quantifies how the volatility of pension expense for a sample of ten Canadian companies sponsoring defined benefit plans will be increased by the adoption of immediate recognition accounting. For certain companies this increase is significant and is shown to have a material earnings impact. The implications of this earnings volatility for the future of defined benefit pension plans are also explored.     

The Impact of the Automatic Balancing Mechanism for the Public Pension in Japan on the Extreme Elderly

Abstract

Most developed countries are seeking ways to maintain a sustainable social security system. Japan is no exception. The old-age dependency ratio in Japan is currently 35% and is expected to be 74% in 2050. Recently the Japanese government has adopted an automatic balancing mechanism, which gradually reduces the real price of the public pension through a reduction of inflation adjustments. The reduction, depending on future demographics, is a random process, so the elderly, in particular the extreme elderly, have to take the risk of receiving an inadequate public pension. The objectives of this paper are threefold. First, we review the recent trends in Japanese mortality and explain the underlying longevity issues that led to the automatic balancing mechanism. Second, by means of stochastic mortality and fertility modeling, we analyze how demographic changes will affect the future of public pensions in Japan. Third, we demonstrate, on the basis of the stochastic projections we made, how the automatic balancing mechanism will affect the financial security for people who live beyond age 100.     

An Investigation of the Pay-As-You-Go Financing Method Using a Contingency Fund and Optimal Control Techniques

Abstract

In many countries, aging populations are expected to lead to substantial rises in the cost of public pension systems financed by the pay-as-you-go (PAYGO) method. These systems will need to be adapted to cope with these changes. This paper considers one approach to reform, described in the literature as “parametric” (see, e.g., Disney 2000), and develops a model for adapting the PAYGO method using a contingency fund and optimal control techniques. The solution of the original model is investigated within two different frameworks: a deterministic-continuous one and a stochastic-discrete one. Finally, a case study applied to Greece is discussed, leading to a potentially acceptable proposal of a smooth path for contribution rates and the age of eligibility for the normal retirement pension.