This issue features three original research articles and an issues & policy article. The first article in the issue is by David McCarthy (Oxford University, UK). A Life Cycle Analysis of Defined Benefit Plans examines optimal benefit design within the context of a lifecycle model. The model finds that the structure of defined benefit plans is unlikely to be optimal for younger workers. The intuition is straightforward: defined benefit pensions depend heavily on the evolution of a worker's human capital and young workers are already heavily exposed to human capital risks. Older workers however may find wage indexed claims to be more valuable as most other human capital uncertainty has vanished.

This paper employs a lifecycle model from the consumption–savings literature to examine the tradeoffs between defined benefit and defined contribution pension plans. We examine the effects of varying risk aversion, varying initial income and financial wealth, and varying wage processes (that may be correlated with returns on the risky asset).

Results indicate that wage-indexed claims are not an optimal vehicle for retirement policy if the decision to participate is made early in life, because individuals hold most of their wealth in their human capital and would not wish to increase their exposure to income shocks. Later in life, after most of a worker's human capital has been converted to financial assets, defined benefit pension plans help increase diversification by reducing exposure to financial market risk. The access that defined benefit plans provide to annuities markets and possible guaranteed rates of return over the risk-free rate increase the value of defined benefit plans to workers. The model also predicts that wage-indexed claims will be more valuable when equity markets provide low expected returns or are highly variable and when annuity markets are inefficient.

The model illustrates two economic functions performed by defined benefit plans. Firstly, DB plans pool individual wage risks. This allows older workers to buy a wage-linked security that increases their exposure to wage risks. Secondly, they create a group annuities market that reduces the cost of adverse selection.

This paper deals with solvency requirements for life annuities portfolios and funded pension plans. Particular emphasis is devoted to longevity risk, i.e. the risk arising from uncertainty in future mortality trends. This risk must be faced by insurance companies and pension plans that have guaranteed lifelong payoffs.

Solvency is investigated referring to immediate annuities, and hence the so-called decumulation phase is addressed. To assess solvency, assets are compared with the random present value of liabilities. Several requirements are considered, each leading to a required asset level that must be financed both with premiums (or contributions) and capital allocation.

For a single equity-linked contract (hence with no mortality diversification), we examine the implications of using option pricing theory to fix the premium. We consider investment strategies involving the underlying, bonds and European puts and compute different probabilities of real loss at any time during the contract term, a form of VaR calculation. With the objective of chosing a strategy to minimize loss probabilities, we exhibit a variety of situations depending on the guarantee, the volatility and the age of the insured.

Pension systems may have a different impact on the two genders because women are less likely than men to work in formal labor markets and earn lower wages when they do. Recent multi-pillar pension reforms tighten the link between payroll contributions and benefits, leading critics to argue that they will hurt women. In contrast, supporters of these reforms argue that women will be helped by the removal of distortions pillar and the better targeted redistributions in the new systems. This paper examines the differential impact of the new and old systems in three Latin American countries – Chile, Argentina and Mexico. Based on household survey data, we simulate the wage and employment histories of representative men and women, the pensions that these are likely to generate under the new and old rules, and the relative gains or losses of the two genders due to the reform. We find that women do indeed accumulate private annuities that are only 30–40% those of men in the new systems. However, this effect is mitigated by sharp targeting of the new public pillars toward low earners, many of whom are women, and by restrictions on payouts from the private pillars, particularly joint annuity requirements. As a result, low-earning married women are the biggest gainers from the pension reform.