A new contract for welfare: partnership in pensions

The government's Green Paper proposes reducing state pension costs whilst encouraging private sector provision. The success of the proposed ‘stakeholder pension schemes’ depends on regulation. However, regulation can penalise those it is intended to protect. This is a sensitive issue, since stakeholder pension schemes are expected to attract financially vulnerable, lower paid, employees. Whilst the flat rate accrual of the state second pension confers some benefit, certain groups are put in a difficult position by the retention of means-tested benefits.     

Complementary pensions in the European Union

In some countries of the European Union (EU) complementary pension schemes represent a major part of pension provision, whereas in others they play a relatively marginal role. An important factor is whether the social security scheme provides earnings-related benefits and whether the ceiling on eligible earnings for social security purposes leaves room for there to be a demand for supplementary pensions arrangements, in particular for the higher paid. Pressures on the financing of social security, especially with the expected ageing of the population in the first 30 years of the next century, are encouraging many countries to develop complementary provision, and a number of new pension laws have been passed in recent years. However, important though the growth of complementary provision is, it should not be forgotten that investment markets are also likely to be affected by the ageing of the population. There are increasing pressures for greater investment freedom for complementary pension schemes, but little progress has been made by the EU in harmonisation of the regulatory regimes for complementary pensions. If mobility of labour between the countries of the EU is to become a reality, progress needs to be made soon on these pensions issues.     

PYRRHIC VICTORY? THE UNINTENDED CONSEQUENCE OF THE PENSIONS ACT 2004

The UK's 2004 Pensions Act is a far-reaching piece of legislation, with significant implications for the occupational pensions marketplace. The Act is intended to improve the governance of pension schemes and increase the security of the members' accrued benefits. However, our research suggests that it will have serious and adverse unintended consequences. The most significant of these will be to undermine occupational pension provision by placing an increased burden on sponsoring employers, whose involvement in pension provision is on a voluntary basis.     

Book Reviews

Changes that have been introduced in Poland in the 1990s have affected not only economic but also social life. These changes concern, among others, the pension scheme which started in Poland on 1 January 1999. This paper's goal is to present the major principles underlying the pension scheme reform in Poland vis-a-vis systems existing in other central and east European countries. They aim at replacing the relatively inefficient redistribution-based system with a mixed pension scheme, largely based on the capital reserve approach. A comparison of solutions employed in the selected countries will allow us to capture trends characterizing the evolution of the pension schemes.     

Optimal annuitisation in a deterministic financial environment

Decisions in Economics and Finance - The global reforms to public pension schemes over the last thirty years have progressively reduced individuals’ post-retirement social security income. In...     

HOW TO CLEAR UP THE PENSIONS MESS

All three pillars of the British pensions system are crumbling. The basic state pension is unsustainable in its present form. Defined benefit occupational pension schemes are fast disappearing, and with them the retirement hopes of millions of workers. A further 3 million low-income earners are not saving enough for their retirement. And uncertainty about pensions choices is widespread. In each case the primary cause of the problem is governmental or regulatory failure. The paper makes eight general and four specific proposals for restoring the system.     

FLEXIBLE RETIREMENT

Flexible retirement – that is, the opportunity to choose one's own personal retirement age – is a hedge against pension risk and provides insurance to workers facing health or productivity shocks. Flexible retirement and flexible pension schemes are in practice closely linked because of imperfect capital markets and institutional restrictions. I discuss three necessary conditions to provide insurance through flexible retirement. First, it should be possible to adjust the pension starting date at limited cost. This condition is gradually being fulfilled, as many countries are moving toward more actuarially neutral pension schemes. Second, individuals should be willing to adjust their labor supply in case of a wealth shock. This condition seems largely fulfilled, although the available empirical evidence suggests that the ‘standard retirement age’ is at least as important as the income effect. Third, the labor market should be able to deal with flexible individual retirement decisions. This condition is gaining importance, but has not yet received much attention in the literature. Institutions often hamper employment past the ‘standard retirement age’. Moreover, the hiring rates of older workers are low and their unemployment duration is high. Institutional reforms facilitating flexible retirement opportunities are desirable from an insurance perspective.     

Examining the Interaction between Saving and Contributions to Personal Pension Plans: Evidence from the BHPS*

This paper analyses the effects of social security reforms on saving in Britain. We use the British Household Panel Survey to investigate the interactions between voluntary additional contributions to personal pension plans (PPP) and saving in conventional forms. In particular, we test whether contributions to the PPP crowd out saving or constitute additional saving. Results suggest that not only have private pension schemes not crowded out private saving, but actually they have increased it too.     

Regulation without Reason: The Deleterious Effects of Government Regulation on Private Pension Provision

In this article, the history of regulation in pensions in the United Kingdom is analysed, in particular with respect to defined benefit occupational pension schemes. A framework of criteria for effective legislation is developed. The original prudent person rule provided a good framework for legislation, but most subsequent regulation that has been enacted does not meet our criteria. Recently regulation has increased the cost and risk of individual schemes and the systemic risk in the system as a whole. The article finds that, in totality, regulation has been disastrous for these schemes, contributing to their demise. The article concludes by briefly outlining how effective regulation might have developed to produce a flexible and resilient system.     

PENSION REFORM,POLITICAL PRESSURE AND PUBLIC CHOICE – THE CASE OF FRANCE

An ageing population and generous public sector pensions have put significant pressure on the funding of the French pension system making a reduction in the scope of state pension schemes imperative. Yet, as public‐choice theory would predict, lobbying by interest groups has made reform difficult to achieve.     

PENSIONS, FERTILITY AND FAMILIES

Public pay-as-you-go pension systems induce low fertility rates, which in turn contribute to the insolvency of those very systems. They have replaced the old-age security motive for having children, which is a major factor behind fertility in their absence. They also penalise fertility by externalising the contributions of children while leaving the costs of child-bearing unaffected. Fertility rates could be raised by moving towards personal savings schemes or re-linking pension benefits to fertility.     

MORE PENSIONS MIS‐SELLING AHEAD: BY GOVERNMENT OF COURSE1

Not only was the infamous Pensions Mis‐selling episode of the 1990s caused directly by government legislation; government has continually mis‐sold on an enormous scale its own pension creations, the state pension schemes. The history of state pensions is a history of broken promises, yet today's pension establishment welcomes the Pension Commission's recommendation for a higher state pension. With this mindset it is hardly surprising that similar approval is given to the Commission's other main recommendation – a National Pensions Saving Scheme, which has all the hallmarks of a fiasco in the making. Furthermore to the extent there is a savings crisis, government is a clear culprit, regularly resorting to low interest rates and the printing press to favour borrowing and not saving. Nor is it surprising that government itself will retain its gold‐plated pension arrangements and in all likelihood will be exempt from these proposals.     

Voting on Pensions: A Survey

Abstract. The paper presents a nonexhaustive survey of the literature designed to explain emergence, size and political sustainability of pay‐as‐you‐go pension systems. It proposes a simple framework of analysis (a small, open, two overlapping generation economy model), around which some variants are displayed. Dictatorship of the median voter is assumed. The text is organized to answer the following questions: (i) Do political equilibria with PAYG pension schemes exist? (ii) Why do they emerge? (iii) What are the conditions for the participation constraint of the pension game to be verified?, and finally, (iv) What is the size of the pension system chosen by the median voter and how is this size influenced by an exogenous (e.g. demographic) shock?     

Pension Funding Constraints and Corporate Expenditures*

This paper examines the impact of a company's pension contributions (PCs) on its dividend and investment policies. The effects of shocks to cash flows on these corporate expenditures are identified by changes to pension funding regulations. Using a sample of DB pension schemes in FTSE350 UK‐listed firms we find a strong negative relation between PCs and corporate dividends even after controlling for the correlation between funding status and unobserved investment opportunities. We find that the more stringent funding requirements under the Pensions Act 2004 had a more pronounced effect on both dividend and investment sensitivities to PCs.     

SAVINGS IN TIMES OF DEMOGRAPHIC CHANGE: LESSONS FROM THE GERMAN EXPERIENCE

Pension reforms in many developed countries make individuals shoulder a bigger share of longevity and income risks. The desired response is that individuals accumulate private assets for retirement. Whether this actually takes place, is of paramount relevance for scientists and policy makers. We take Germany as an example: Twenty years of pension reform have transformed the monolithic German pension system into a multipillar system. Formerly generous public pension benefits are gradually being reduced, whereas substantial incentives are granted to occupational and private saving schemes. Has this transition worked out? We survey the reform steps and households’ reactions: How did individuals adjust their labor market behavior? How did private and occupational pension plans take off? How do behavioral adjustments vary in the population? Most Germans adapted to the new situation. Both actual and expected retirement decisions changed and the share of households without supplementary pensions decreased from 73% to 39% in little more than a decade. This is a remarkable success. Nonetheless, households with low education, low income and less financial education did neither adjust their retirement behavior nor pick up supplementary pension plans and are thus likely to face difficulties in bridging the gap arising in future pension income.     

The transition from social insecurity

The paper analyses the insecurity of state relative to private pensions. It considers issues such as moral hazard, policy-induced risk and the way in which property rights accrue to a scheme's beneficiaries. The article concludes that state schemes are fundamentally more insecure than private schemes and that the difficulties of state schemes have not arisen simply because of an accident of demographics. The difficulties of private pension schemes are also discussed as well as the transition problems arising from moving from state to private arrangements.     

Occupational pension schemes: the trade union demension

Here the scope for unions to further the interests of the members of occupational pension schemes is discussed. These complex issues have been further complicated by recent pensions scandals, associated employee distress, and proposals for reform of a relatively modest nature.     

Pensions: the voluntary growth of participation*

In spite of the deepening of the economic recession, the issue of employee participation or industrial democracy has not disappeared from the political or industrial agendas. This article, which reports the findings of a two year UK study at Glasgow University, examines one area of survival—employee participation in the management of pension schemes.     

From Bismarck to Friedman

Chile provides the most frequently quoted example of a change from an established state PAYGO pension system to a privately funded scheme based on personal savings. Most of the key results have been impressive and a lot of the often-heard criticisms of funded schemes have been disproved. A number of shortcomings remain. These shortcomings are seldom caused by features inherent to funded schemes, but rather by elements specific to the Chilean arrangement which could be altered given the political will.     

Notional Defined Contribution Accounts

A bstract    Notional defined contribution (NDC) accounts represent a new model for social security reform that so far has been adopted in seven countries. While NDC schemes remain public, they call for the individual accounts favored by neoliberal policy analysts. NDC schemes would address many of the demographic and fiscal problems threatening pension systems but, depending on the country, could do so in a way that puts low-paid workers and women at greater risk than do the schemes being replaced. NDC systems are often the result of a compromise between different interest groups, typically between neoliberal economic elites on the right and labor unions or pensioners' organizations on the left.