Quantifying mortality risk in small defined-benefit pension schemes

A risk of small defined-benefit pension schemes is that there are too few members to eliminate idiosyncratic mortality risk, that is, there are too few members to effectively pool mortality risk. This means that when there are few members in the scheme, there is an increased risk of the liability value deviating significantly from the expected liability value, as compared to a large scheme. We quantify this risk through examining the coefficient of variation of a scheme's liability value relative to its expected value. We examine how the coefficient of variation varies with the number of members and find that, even with a few hundred members in the scheme, idiosyncratic mortality risk may still be significant. Next we quantify the amount of the mortality risk concentrated in the executive section of the scheme, where the executives receive a benefit that is higher than the non-executive benefit. We use the Euler capital allocation principle to allocate the total standard deviation of the liability value between the executive and non-executive sections. The results suggest that the mortality risk of the scheme should be monitored and managed within the sections of a scheme and not only on a scheme-wide basis.     

Contextualizing the trend from output to outcome measurement: the Dutch pension system

Measuring outcomes rather than outputs is assumed to increase transparency in reporting. The authors discuss changes in the performance indicators used in the Dutch pension system from output to outcome measures. Expectations were not met. The main outcome assessed related to the viability of the system in the long run. A side-effect was that transparency for the stakeholders was diminished.     

Analysis of embedded options in individual pension schemes in Germany

Newly introduced government-subsidized pension products in Germany are required to contain a promise by the seller to provide a “money-back guarantee” at the end of the term. The client is also given the right to stop paying premiums at any time (paid-up option). In this case, the amount of all premiums paid must also be guaranteed by the seller at maturity, no matter when the client stopped paying the premiums. Previous analyses of guarantees in such government-subsidized pension products have ignored this additional option. Within a generalized Black/Scholes framework, we analyze the value of the paid-up option for different products, market scenarios, and client behavior. Our results indicate that the paid-up option significantly increases the value of the money-back guarantee. Furthermore, we find that reducing volatility by shifting the client’s assets from stocks to bonds as maturity approaches is a suitable means of reducing the risk arising from the “pure” money-back guarantee but much less effective in reducing the risk arising from the paid-up option. JEL Classification G13 · G23 · G28     

Assessing the welfare change from a pension reform

We study the welfare implications of a hypothetical reform of the Swedish public pension system where eligibility to pension benefits is delayed by 3 years. Using an option value model, we consider the labor supply responses to the reform and develop a compensating variation (CV) measure to analytically assess the individual welfare changes in a random utility framework. We find that a purely budgetary calculation (neglecting individual labor supply responses) overestimates the welfare loss by more than 65%. We also develop a method for testing between a binary and a multinomial option value model, where the binary one is nested in the multinomial model in a Generalized Extreme Value (GEV) model framework. The binary model cannot be rejected.     

The international spillover effects of pension reform

This paper explores how pension reforms in countries with PAYG schemes affect countries with funded systems. We use a two-country two-period overlapping-generations model, where the countries only differ in their pension systems. We distinguish between the case where a reform potentially leads to a Pareto improvement in the PAYG country, and where this is impossible. In the latter case, the funded country shares both in the costs and the benefits of the reform. However, if a Pareto-improving pension reform is feasible in the PAYG country, a Pareto improvement in the funded country is not guaranteed.     

The tax treatment of UK defined contribution pension schemes

The paper aims to clarify the tax status of pension schemes in the UK and, by using economic and other arguments, to establish a theoretical benchmark that could be considered the ‘appropriate’ tax regime for pension saving. We consider existing tax regimes for saving (such as the ‘ISA’ regime) and theoretical regimes (such as a pure expenditure tax and a comprehensive income tax) and we compare the costs different tax regimes impose on defined contribution pension schemes. We conclude that an expenditure tax is an appropriate benchmark tax regime for pension saving, and that other tax regimes impose additional financial as well as administrative costs.     

Inside debt and firm risk-taking: Evidence from the UK pension reform

This paper provides new evidence on the relation between CEO inside debt and firm risk-taking by exploiting the change in the tax treatment of UK pensions following two pension amendments. The 2006 pension reform introduces the annual and lifetime allowance for UK pension schemes, significantly increasing income taxes associated with CEO inside debt. The 2011 allowance cut, which substantially reduces the annual allowance introduced in 2006, further increases income taxes on inside debt. We find that CEO inside debt, in the form of executive pensions declines after the 2006 reform while cash-in-lieu increases significantly. This effect is more severe after the 2011 allowance cut than the 2006 pension reform. UK firms appear to substitute away from pensions towards cash-in-lieu, where income taxes are less punishing. If the association between CEO inside debt and firm risk-taking is causal, we should observe a change of risk-taking after the decline of inside debt. Our results, which exploit the exogenous nature of the reforms, show that the decline of CEO pensions does not lead to any change in firm risk-taking. This result suggests that no causal relationship exists between CEO inside debt and firm risk-taking. Our results extend the inside debt literature, where empirical evidence is mainly documented in the US. Contrary to findings in the US, our evidence suggests that the use of CEO inside debt is motivated to minimise income tax rather than a tool to moderate firm risk.     

Ageing and the tax implied in public pension schemes: simulations for selected OECD countries

A key figure suited to measuring intergenerational imbalances in unfunded public pension schemes is given by the ‘implicit tax rate’ imposed on each generation's lifetime income. The implicit tax arises from the fact that, quite generally, pension benefits fall short of actuarial returns to contributions paid to these systems while actively working. Under current pension policies, implicit tax rates will increase sharply for younger generations in most industrialised countries. In this paper, this is illustrated for the cases of France, Germany, Italy, Japan, Sweden, the UK and the USA. Nevertheless, there are remarkable differences across countries regarding both the level of implicit taxes and their development over successive age cohorts, which can be attributed to differences in ageing processes and in the institutional features of national pension systems. In addition, we can demonstrate how effective different approaches to pension reform are in smoothing the intergenerational profile of implicit tax rates.     

中国企业年金的改革与发展

企业年金是养老保险体系的重要支柱之一。为适应社会主义市场经济的发展和老龄化的趋势,有必要借鉴国外企业年金的发展经验,促进我国企业年金健康发展。     

英国养老金私有化改革的历程与评价

英国是较早进行养老金私有化改革的国家之一,开始于20世纪70年代末的"协议退出",导致保障水平下降、养老金收入差距拉大、基金管理费用高等问题日益显现,退出比例本身也呈下降趋势,人们越来越倾向于回到依靠国家养老金的老路上来.政府在新的改革中再次推行均等化,提高制度的再分配性.这一改革历程凸显反复、频繁、复杂,一方面给个人...     

Funding a PAYG pension system: the case of Italy

Italy is characterised by a mature pay‐as‐you‐go social security system and by particularly adverse population projections. Given these trends, the social security contribution rate is expected to increase above its current high level. This hinders the development of employer‐provided pension funds and introduces a significant wedge between labour cost and earnings that discourages both labour demand and labour supply. Any proposal to reduce payroll taxes and to reform the system in the direction of partial funding has to cope with the state of Italian public finances. Italy has to comply with the Stability and Growth Pact that imposes constraints on budget deficit and debt trends. Using micro data from the Bank of Italy's Survey of Household Income and Wealth and official population projections, we estimate future employment trends under different demographic and macroeconomic scenarios and compute the cost of the transition. We show that it would be substantially reduced if positive effects on employment were induced by the payroll tax reduction.     

A global trend: privatization and reform of social security pension plans

Ten years ago Chile successfully privatized its social security system, beginning a worldwide trend to solve the problem of an increasing burden on government-supported social security programs. Contributing factors include an aging population, fewer workers to support retirees, government budget deficits and the influence of politics.     

Discretionary accounting choices: the case of IAS 19 pension accounting

Based on a sample of 3207 firm-year observations for the years 2005–2013, we investigate how stock-listed companies in France, Germany and the UK use two discretionary choices in their accounting for defined benefit pension plans under International Accounting Standard (IAS) 19 Employee Benefits. We first analyse companies’ decision whether to voluntarily early adopt the equity method of accounting for actuarial gains and losses. Second, we analyse companies’ choice to present pension interest cost and expected return on plan assets, or, in 2013, net pension interest cost, in operating or financial income. Our findings provide evidence that companies’ decisions to early adopt the equity method in 2005, the first year this accounting choice was available, were motivated by short-term effects on equity. Our analyses also indicate that the choice regarding where to present interest cost and expected return on plan assets in the income statement is associated with the resulting effect on Earnings before Interest and Tax. Finally, we document country-specific differences in the use of the discretion provided under IAS 19, suggesting that discretionary pension accounting choices may impede comparability.     

An analysis of the value of cash flow statements of New Zealand pension schemes

Superannuation (pension, retirement) schemes (plans) are required to report their earnings on a fair-value basis, reflecting recent shifts toward fair-value reporting in financial reporting. Fair-value earnings of such schemes include realised earnings and unrealised changes in values of assets and liabilities (unrealised earnings). This study examines the relation between components of fair-value earnings (realised and unrealised) and cash flows of 161 New Zealand defined benefit schemes for the financial year 1998. The findings of the study include that realised earnings are negatively associated with unrealised earnings and positively associated with cash flows from operations, but no association is found between unrealised earnings and cash flows from operations. This suggests that fair-value reporting has reduced the informational disparity between realised earnings and operating cash flows and therefore the reporting of cash flows information may not provide users with different information from reported in realised earnings. However, the results suggest that unrealised earnings provide additional information to users.     

A critical review of the 2015 South Korean civil service pension reform

The Republic of Korea’s civil service pension (KCSP) was established in 1960 and has been changed several times to overcome the serious financial burdens it has placed on the country. Major problems related to the KCSP include its structure (low contribution and high benefit) and the country’s rapidly aging population. The authors examine the 2015 KCSP reform, reviewing the reasons for the reform, its process, and its fiscal and policy implications. Reforms in other countries are briefly compared. The paper provides important lessons for researchers and practitioners involved in public sector pension reforms.     

Political images of the future: The Dutch case

The Netherlands Scientific Council for Government Policy is responsible for supplying, for use in deciding government policy, scientifically sound information on developments which may affect society in the long term. It also draws attention to anticipated anomalies and bottlenecks, defines major policy problems, and indicates alternatives. This article describes the Council's future survey and its use of various normative perceptions discernible in the political system. Six characteristic sociopolitical orientations are identified and the likely consequences of each are depicted, with the goal of stimulating future-oriented policies. Finally, the Dutch approach is compared with the approaches in other surveys of the future.     

Cash balance pension plans: A case of standard-setting inadequacy

Accounting for and ownership of U.S. private employee pensions has long been a controversial and politically contested terrain. The uniqueness in the U.S. of using employers as the principal provider of pensions makes the reporting of pensions more problematic since the corporate employers providing pensions are not strictly accountable to only the pensioners. Over the last quarter century there has been a marked swing in power toward management and away from employees making it possible for increasing numbers of U.S. companies to switch from conventional defined benefit plans to cash balance plans. This paper provides a “case” study of how accounting standard-setters framed the pension reporting problem vis-à-vis how they frame the “reporting problem” in general. Utilizing various sources of commentary about the phenomenon of cash-balance conversions, we triangulate on the pension problem to demonstrate how current FASB disclosure rules fail to satisfy the condition of neutrality and how those rules have facilitated the shifting of economic risk from shareholders to employees.     

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.     

Share prices and pension funding: An empirical test of the joint effect of pension insurance and the pension tax shield

This article examines the joint significance of the tax benefits of pension funding and the value of government sponsored pension insurance in determining the efficacy of corporate pension funding. When the pension tax shield benefits are dominant, additional funding may enhance shareholder wealth. However, additional funding is observed to have negative effects on equity prices when the value of pension insurance is dominant relative to the value of the pension tax shield. When neither the tax or insurance effects are dominant, marginal adjustments in pension funding apparently will not alter corporate share prices.