Hostname: page-component-cd9895bd7-lnqnp Total loading time: 0 Render date: 2024-12-23T05:55:32.087Z Has data issue: false hasContentIssue false

Collective pension schemes and individual choice*

Published online by Cambridge University Press:  16 December 2013

JULES H. VAN BINSBERGEN
Affiliation:
Stanford GSB, NBER and Tilburg University (e-mail: [email protected])
DIRK BROEDERS
Affiliation:
De Nederlandsche Bank, Senior Strategy Advisor, Supervision Policy Division (e-mail: [email protected])
MYRTHE DE JONG
Affiliation:
Ministry of Finance, Senior Policy Advisor, Financial and Economic Policy Directorate (e-mail: [email protected])
RALPH S. J. KOIJEN
Affiliation:
London Business School and Netspar (Tilburg University) (e-mail: [email protected])

Abstract

Collective pension schemes are the dominant form of saving for retirement in the Netherlands. We investigate the introduction of individual choices into a collective pension system without affecting the generally accepted advantages of a collective agreement. Increasing individual choices can be beneficial, as it prevents pension plans from making decisions for the average plan participant that may not be optimal for individual participants. We argue for a system in which individuals choose from a set of low-cost balanced index funds, together with a level of intergenerational guarantees that are exchange-traded. This system maintains the two primary advantages of collective agreements: risk sharing and low implementation costs, while facilitating different risk taking behavior at the individual level. To facilitate individual choices within collective pension schemes, it is important to enhance the transparency associated with intergenerational guarantees to all participants in the scheme, both in terms of their price and quantity. We argue that the current system, in which long-term guarantees are given by the young to the old within a specific fund but not across pension funds, is not transparent and we argue that it can be suboptimal. We propose a system of Pension Guarantee Exchanges (PGEs) that increase transparency and allow pension funds with different age distributions to trade with each other. Knowing the price of such guarantees facilitates the introduction of individual portfolio choices within collective pension schemes.

Type
Issues and Policy
Copyright
Copyright © Cambridge University Press 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

*

We thank an anonymous referee, Roel Beetsma, Lans Bovenberg, Roderick Molenaar, Theo Nijman, Alwin Oerlemans, Laurens Swinkels, and Coen Teulings for helpful comments and suggestions.

References

Benzoni, L., Collin-Dufresne, P. and Goldstein, R. (2007) Portfolio choice over the life-cycle when the stock and labor markets are cointegrated. Journal of Finance, 62: 21232167.Google Scholar
Beshears, J., Choi, J. J., Laibson, D., Madrian, B. C. and Sakong, J. (2011) Self control and liquidity: how to design a commitment contract. Working Paper Stanford GSB.Google Scholar
Binsbergen, J. H. v. and Brandt, M. W. (2007) Optimal Asset Allocation in Asset Liability Management. Working Paper Stanford GSB.Google Scholar
Binsbergen, J. H. v. and Koijen, R. S. (2010) Predictive regressions: a present-value approach. Journal of Finance, 65: 14391471.CrossRefGoogle Scholar
Binsbergen, J. v., Brandt, M. W. and Koijen, R. S. (2008) Optimal decentralized investment management. Journal of Finance, 53(4): 18491894.Google Scholar
Bodie, Z., Merton, R. C. and Samuelson, W. (1992) Labor supply flexibility and portfolio choice in a life-cycle model. Journal of Economic Dynamics and Control, 16: 427449.Google Scholar
Calvet, L. E., Campbell, J. Y. and Sodini, P. (2007) Down or out: assessing the welfare costs of household mistakes. Journal of Political Economy, 115: 707747.Google Scholar
Campbell, J. Y. and Shiller, R. J. (1988) The dividend-price ratio and expectations of future dividends and discount factors. Review of Financial Studies, 1: 195227.CrossRefGoogle Scholar
Campbell, J. Y. and Viceira, L. (2001) Strategic Asset Allocation: Portfolio Choice for Long-Term Investors. London, UK: Oxford University Press.Google Scholar
Campbell, J. Y. and Viceira, L. M. (1999) Consumption and portfolio decisions when expected returns are time varying. Quarterly Journal of Economics, 114: 433496.Google Scholar
Cochrane, J. H. (1991) Explaining the variance of price-dividend ratios. Review of Financial Studies, 5(2): 243280.Google Scholar
Gregory Mankiw, N. and Zeldes, Z. P. (1991) The consumption and stockholders and nonstockholders. Journal of Financial Economics, 29: 97112.Google Scholar
Koijen, R. S., Van Nieuwerburgh, S. and Yogo, M. (2012) Health and mortality delta: assessing the welfare cost of household insurance choice. Working Paper University of Chicago.Google Scholar
Sharpe, W. F. (1981) Decentralized investment management. Journal of Finance, 36: 217234.Google Scholar
Teulings, C. and de Vries, C. (2006) Generational accounting, solidarity and pension losses. De Economist, 146: 6383.Google Scholar
Vissing-Jorgensen, A. (2002) Limited asset market participation and the elasticity of intertemporal substitution. Journal of Political Economy, 110(4): 825853.Google Scholar