Defined contribution (DC) or money purchase pension saving schemes place the onus on participants to make decisions on asset allocation, the choice of investment vehicles, and the extent to which changes in individual circumstances and macroeconomic conditions should affect investment strategy. Many people are ill-equipped to make these types of decisions. The role of third-party advisers is quite problematic, particularly when their incentives are inconsistent with the interests of those that seek advice. In this paper, we report the results of a comprehensive study of the advice sought by Australian DC participants from their plan sponsors (agent) over time, explaining observed patterns by reference to participants’ age and gender, the salience of the issue, and the size-of-bet effect. The mode of inquiry, the frequency and volume of contact by plan participants, and the sensitivity of participants to announced changes in the national pension regime and macroeconomic events are also considered. Whereas research on this topic has focused upon fee-for-service advisers, we focus upon the advice provided by the agent of DC plan sponsors that has no direct interest in the outcome of calls or web-based inquiries. Analysis takes in approximately 430,000 Australians over the period 2004 to 2013.
{"title":"The Demand for Advice in Defined Contribution Pension Plans: Age, Gender, and the Size-of-Bet Effect","authors":"G. Clark, Maurizio Fiaschetti, P. Gerrans","doi":"10.2139/ssrn.2551819","DOIUrl":"https://doi.org/10.2139/ssrn.2551819","url":null,"abstract":"Defined contribution (DC) or money purchase pension saving schemes place the onus on participants to make decisions on asset allocation, the choice of investment vehicles, and the extent to which changes in individual circumstances and macroeconomic conditions should affect investment strategy. Many people are ill-equipped to make these types of decisions. The role of third-party advisers is quite problematic, particularly when their incentives are inconsistent with the interests of those that seek advice. In this paper, we report the results of a comprehensive study of the advice sought by Australian DC participants from their plan sponsors (agent) over time, explaining observed patterns by reference to participants’ age and gender, the salience of the issue, and the size-of-bet effect. The mode of inquiry, the frequency and volume of contact by plan participants, and the sensitivity of participants to announced changes in the national pension regime and macroeconomic events are also considered. Whereas research on this topic has focused upon fee-for-service advisers, we focus upon the advice provided by the agent of DC plan sponsors that has no direct interest in the outcome of calls or web-based inquiries. Analysis takes in approximately 430,000 Australians over the period 2004 to 2013.","PeriodicalId":400499,"journal":{"name":"SIRN: Employment-Based Pensions (Topic)","volume":"24 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-01-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116132923","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Starting in 1943 New Zealand and Australia have negotiated a series of social security agreements to coordinate and harmonise the payment of pensions to individuals who migrated between the countries. Until 2001 these were negotiated on a “host country” basis meaning the state where the claimant resided would largely meet the cost of any benefits paid to them even though the claimant had spent part of their working life in the other state. In 2001 a revised SSA was negotiated which adopted a shared funding model where each state pays a part pension to a claimant based on of how much of their working life the claimant has spent in each state. This is intended to produce a fairer allocation of pension costs when taking into account the tax that would have been collected by each state from the claimant. However, in calculating the amount of pension each state must pay two factors come into play which complicates the calculation. Firstly the total amount of the two part pensions payable to the claimant is determined solely by the domestic pension rules of the state where the claimant has retired. Secondly, the amount the other state must contribute to that pension is determined by their domestic pension rules, not the rules of the state where the claimant has retired. As a consequence the costs of meeting the overall pension may be disproportionately borne by one of the states.This paper will examine which state has the greatest liability for pension payments under the 2001 SSA by analysing the results obtained by a simple model. The results obtained show that Australia is liable for a greater than proportionate share of pension costs if low or moderately wealthy persons migrate to Australia from New Zealand or vice-versa. The reverse is true for more wealthy migrants, however, if their wealth exceeds a certain threshold New Zealand gains absolutely if they retire in Australia. The results obtained raise questions about the sustainability of the 2001 SSA especially if Australia’s economy continues to perform better than the New Zealand one.
{"title":"Cost Sharing of Pensions Paid Under the 2001 New Zealand-Australia Social Security Agreement: Should It Be Time for Change?","authors":"Andrew M. C. Smith","doi":"10.2139/SSRN.2569463","DOIUrl":"https://doi.org/10.2139/SSRN.2569463","url":null,"abstract":"Starting in 1943 New Zealand and Australia have negotiated a series of social security agreements to coordinate and harmonise the payment of pensions to individuals who migrated between the countries. Until 2001 these were negotiated on a “host country” basis meaning the state where the claimant resided would largely meet the cost of any benefits paid to them even though the claimant had spent part of their working life in the other state. In 2001 a revised SSA was negotiated which adopted a shared funding model where each state pays a part pension to a claimant based on of how much of their working life the claimant has spent in each state. This is intended to produce a fairer allocation of pension costs when taking into account the tax that would have been collected by each state from the claimant. However, in calculating the amount of pension each state must pay two factors come into play which complicates the calculation. Firstly the total amount of the two part pensions payable to the claimant is determined solely by the domestic pension rules of the state where the claimant has retired. Secondly, the amount the other state must contribute to that pension is determined by their domestic pension rules, not the rules of the state where the claimant has retired. As a consequence the costs of meeting the overall pension may be disproportionately borne by one of the states.This paper will examine which state has the greatest liability for pension payments under the 2001 SSA by analysing the results obtained by a simple model. The results obtained show that Australia is liable for a greater than proportionate share of pension costs if low or moderately wealthy persons migrate to Australia from New Zealand or vice-versa. The reverse is true for more wealthy migrants, however, if their wealth exceeds a certain threshold New Zealand gains absolutely if they retire in Australia. The results obtained raise questions about the sustainability of the 2001 SSA especially if Australia’s economy continues to perform better than the New Zealand one.","PeriodicalId":400499,"journal":{"name":"SIRN: Employment-Based Pensions (Topic)","volume":"194 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-12-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121117379","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper studies the surplus-sharing effects on the risk-taking of a corporate defined benefit (DB) pension plan. The focus is on the influence of the participants’ proportion of surplus and of the relative weight of equityholders to participants. We prove that participants’ risk-taking increases due to surplus sharing and when decreasing the participants’ proportion of surplus. Numerical results show that surplus sharing makes also equityholders less risk averse and that equityholders’ risk-taking in general increases when increasing the participants’ proportion of surplus. We prove that, in the portfolio considering both participants’ and equityholders’ interests, increasing the weight of equityholders to participants decreases risk-taking when the participants’ proportion of surplus or the funding level is low. The numerical analysis also shows that conflicts of interest between participants and equityholders are common and that in order to ensure that the plan’s risk-taking is never very high, the relative weight of equityholders to participants should be high.
{"title":"Does Surplus Sharing Increase Risk-Taking in a Corporate Defined Benefit Pension Plan?","authors":"Katarzyna Romaniuk","doi":"10.2139/ssrn.2159416","DOIUrl":"https://doi.org/10.2139/ssrn.2159416","url":null,"abstract":"This paper studies the surplus-sharing effects on the risk-taking of a corporate defined benefit (DB) pension plan. The focus is on the influence of the participants’ proportion of surplus and of the relative weight of equityholders to participants. We prove that participants’ risk-taking increases due to surplus sharing and when decreasing the participants’ proportion of surplus. Numerical results show that surplus sharing makes also equityholders less risk averse and that equityholders’ risk-taking in general increases when increasing the participants’ proportion of surplus. We prove that, in the portfolio considering both participants’ and equityholders’ interests, increasing the weight of equityholders to participants decreases risk-taking when the participants’ proportion of surplus or the funding level is low. The numerical analysis also shows that conflicts of interest between participants and equityholders are common and that in order to ensure that the plan’s risk-taking is never very high, the relative weight of equityholders to participants should be high.","PeriodicalId":400499,"journal":{"name":"SIRN: Employment-Based Pensions (Topic)","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-10-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115044672","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper reviews documentation provided on the Pension Benefit Guaranty Corporation’s (PBGC’s) Pension Insurance Modeling System (PIMS). It also discusses priorities for future development of the system, based on emerging issues in pension plan design and environment, and it suggests particular emphasis be placed on improvements in refining the modeling of the multiemployer program.
{"title":"Actuarial Perspectives on Defined Benefit Pension Risk -- Modeling Emerging Issues","authors":"Christopher M. Bone","doi":"10.2139/ssrn.2337120","DOIUrl":"https://doi.org/10.2139/ssrn.2337120","url":null,"abstract":"This paper reviews documentation provided on the Pension Benefit Guaranty Corporation’s (PBGC’s) Pension Insurance Modeling System (PIMS). It also discusses priorities for future development of the system, based on emerging issues in pension plan design and environment, and it suggests particular emphasis be placed on improvements in refining the modeling of the multiemployer program.","PeriodicalId":400499,"journal":{"name":"SIRN: Employment-Based Pensions (Topic)","volume":"30 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132557906","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper explores the optimal degree of funding of public sector pension plans. It is assumed that a benevolent social planner decides on the contribution of current taxpayers to the funding of public sector pensions next period, weighing the interests of current and future tax payers. Two elements play a role in the optimal funding decision: the optimal-portfolio choice (i.e. the tradeoff between the expected excess return and the additional risk of funding vis-a-vis pay-as-you-go) and intergenerational redistribution (i.e. whether the current generation of tax payers is willing and capable to prefund the pension obligations of current public sector workers or shifts the burden to future generations via a pay-as-you-go scheme). The optimal degree of funding appears to vary over time, depending not only on the relative weight given to the current generation, risk aversion, and the distribution of financial risk and human capital risk, but also on the actual state of the economy, i.e. on wage income, funding in the past and the realization of the excess return on this funding.
{"title":"Optimal Degree of Funding of Public Sector Pension Plans","authors":"A. C. Meíjdam, Eduard H. M. Ponds, L. Meijdam","doi":"10.2139/ssrn.2216584","DOIUrl":"https://doi.org/10.2139/ssrn.2216584","url":null,"abstract":"This paper explores the optimal degree of funding of public sector pension plans. It is assumed that a benevolent social planner decides on the contribution of current taxpayers to the funding of public sector pensions next period, weighing the interests of current and future tax payers. Two elements play a role in the optimal funding decision: the optimal-portfolio choice (i.e. the tradeoff between the expected excess return and the additional risk of funding vis-a-vis pay-as-you-go) and intergenerational redistribution (i.e. whether the current generation of tax payers is willing and capable to prefund the pension obligations of current public sector workers or shifts the burden to future generations via a pay-as-you-go scheme). The optimal degree of funding appears to vary over time, depending not only on the relative weight given to the current generation, risk aversion, and the distribution of financial risk and human capital risk, but also on the actual state of the economy, i.e. on wage income, funding in the past and the realization of the excess return on this funding.","PeriodicalId":400499,"journal":{"name":"SIRN: Employment-Based Pensions (Topic)","volume":" 5","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-02-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"120828679","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study uses restricted microdata from the National Compensation Survey to examine the impact of auto enrollment on employee compensation. By boosting plan participation, automatic enrollment likely increases employer costs when previously unenrolled workers receive matching retirement plan contributions. Our data show significant negative correlation between employer match rates and automatic enrollment provision. We find no evidence that total costs differ between firms with and without automatic enrollment, and no evidence that defined contribution costs crowd out other forms of compensation, suggesting that firms might be lowering their potential and/or default match rates enough to completely offset the higher costs of automatic enrollment without needing to reduce other compensation costs.
{"title":"Automatic Enrollment, Employee Compensation, and Retirement Security","authors":"B. Butrica, Nadia S. Karamcheva","doi":"10.2139/ssrn.2181649","DOIUrl":"https://doi.org/10.2139/ssrn.2181649","url":null,"abstract":"This study uses restricted microdata from the National Compensation Survey to examine the impact of auto enrollment on employee compensation. By boosting plan participation, automatic enrollment likely increases employer costs when previously unenrolled workers receive matching retirement plan contributions. Our data show significant negative correlation between employer match rates and automatic enrollment provision. We find no evidence that total costs differ between firms with and without automatic enrollment, and no evidence that defined contribution costs crowd out other forms of compensation, suggesting that firms might be lowering their potential and/or default match rates enough to completely offset the higher costs of automatic enrollment without needing to reduce other compensation costs.","PeriodicalId":400499,"journal":{"name":"SIRN: Employment-Based Pensions (Topic)","volume":"47 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114554036","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A. Munnell, J. Aubry, Josh Hurwitz, Laura D. Quinby
States and localities account for pensions in their financial statements according to standards laid out by the Governmental Accounting Standards Board (GASB). Under these standards, state and local plans generally follow an actuarial model and discount their liabilities by the long-term yield on the assets held in the pension fund, roughly 8 percent. Most economists contend that the discount rate should reflect the risk associated with the liabilities and, given that benefits are guaranteed under most state laws, the appropriate discount factor is closer to the riskless rate. The point is not that liabilities should be larger or smaller, but rather that the discount rate should reflect the nature of the liabilities; the characteristics of the assets backing the liabilities are irrelevant.
{"title":"How Would GASB Proposals Affect State and Local Pension Reporting?","authors":"A. Munnell, J. Aubry, Josh Hurwitz, Laura D. Quinby","doi":"10.2139/SSRN.2316838","DOIUrl":"https://doi.org/10.2139/SSRN.2316838","url":null,"abstract":"States and localities account for pensions in their financial statements according to standards laid out by the Governmental Accounting Standards Board (GASB). Under these standards, state and local plans generally follow an actuarial model and discount their liabilities by the long-term yield on the assets held in the pension fund, roughly 8 percent. Most economists contend that the discount rate should reflect the risk associated with the liabilities and, given that benefits are guaranteed under most state laws, the appropriate discount factor is closer to the riskless rate. The point is not that liabilities should be larger or smaller, but rather that the discount rate should reflect the nature of the liabilities; the characteristics of the assets backing the liabilities are irrelevant.","PeriodicalId":400499,"journal":{"name":"SIRN: Employment-Based Pensions (Topic)","volume":"142 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132890985","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pension fund returns can be decomposed into different sources, including market movements, asset allocation policy, and active portfolio management. We use a unique database covering the asset allocations of US defined-benefit pension funds for the period 1990-2008, and we test the role of each factor in explaining their returns. Our results shed new light on pension funds’ sources of performance. While the previous literature emphasized that policy allocation accounts for the bulk of returns, leaving little room for active management, we show that taking explicit account of market movement can change the results significantly. Although active management plays a minor role in global asset allocation, its role is predominant in explaining returns to individual asset classes, whether traditional or alternative. This paper rehabilitates the contribution of active management as a source of performance for pension funds, at least at the asset class level.
{"title":"Rehabilitating the Role of Active Management for Pension Funds","authors":"M. Aglietta, M. Brière, S. Rigot, O. Signori","doi":"10.2139/ssrn.1948726","DOIUrl":"https://doi.org/10.2139/ssrn.1948726","url":null,"abstract":"Pension fund returns can be decomposed into different sources, including market movements, asset allocation policy, and active portfolio management. We use a unique database covering the asset allocations of US defined-benefit pension funds for the period 1990-2008, and we test the role of each factor in explaining their returns. Our results shed new light on pension funds’ sources of performance. While the previous literature emphasized that policy allocation accounts for the bulk of returns, leaving little room for active management, we show that taking explicit account of market movement can change the results significantly. Although active management plays a minor role in global asset allocation, its role is predominant in explaining returns to individual asset classes, whether traditional or alternative. This paper rehabilitates the contribution of active management as a source of performance for pension funds, at least at the asset class level.","PeriodicalId":400499,"journal":{"name":"SIRN: Employment-Based Pensions (Topic)","volume":"165 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123137117","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper explores the introduction of collective risk-sharing elements in defined contribution pension contracts. We consider status-contingent, age-contingent and asset contingent risk-sharing arrangements. All arrangements raise aggregate welfare, as measured by equivalent variations. While working individuals hardly benefit or may even lose, retirees experience substantial welfare gains. An increase in the tax deductability of pension contributions can be beneficial for working cohorts, but comes at the cost of a reduction in aggregate welfare due to efficiency losses.
{"title":"Risk Sharing in Defined-Contribution Funded Pension System","authors":"R. Beetsma, A. Bucciol","doi":"10.2139/ssrn.1975239","DOIUrl":"https://doi.org/10.2139/ssrn.1975239","url":null,"abstract":"This paper explores the introduction of collective risk-sharing elements in defined contribution pension contracts. We consider status-contingent, age-contingent and asset contingent risk-sharing arrangements. All arrangements raise aggregate welfare, as measured by equivalent variations. While working individuals hardly benefit or may even lose, retirees experience substantial welfare gains. An increase in the tax deductability of pension contributions can be beneficial for working cohorts, but comes at the cost of a reduction in aggregate welfare due to efficiency losses.","PeriodicalId":400499,"journal":{"name":"SIRN: Employment-Based Pensions (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-11-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114435145","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper provides the results of analyses of key problems related to pension systems and their reforms in Russia and Ukraine. The pension systems and their reforms in both countries are compared. They are also compared with the general picture observed in the OECD or selected countries belonging to that area. The analysis focuses on long-term trends rather than short-term shocks. The recent economic crisis is not covered since the analysis was mostly completed by 2008. First, we present the general picture which describes the current demographic and economic situations as well as the challenges that are being faced. Then we turn to reform options and actions already taken. We particularly focus on issues that are specific to the countries analyzed.
{"title":"Pension Reform Options for Russia and Ukraine: A Critical Analysis of Available Options and Their Expected Outcomes","authors":"M. Góra, Oleksandr Rohozynsky, O. Sinyavskaya","doi":"10.2139/ssrn.1580055","DOIUrl":"https://doi.org/10.2139/ssrn.1580055","url":null,"abstract":"This paper provides the results of analyses of key problems related to pension systems and their reforms in Russia and Ukraine. The pension systems and their reforms in both countries are compared. They are also compared with the general picture observed in the OECD or selected countries belonging to that area. The analysis focuses on long-term trends rather than short-term shocks. The recent economic crisis is not covered since the analysis was mostly completed by 2008. First, we present the general picture which describes the current demographic and economic situations as well as the challenges that are being faced. Then we turn to reform options and actions already taken. We particularly focus on issues that are specific to the countries analyzed.","PeriodicalId":400499,"journal":{"name":"SIRN: Employment-Based Pensions (Topic)","volume":"129 ","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133557477","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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