Many retirees hope to continue earning capital market rewards on their saving while avoiding outliving their funds during retirement. We model a dynamic utility maximizing investor who seeks to benefit from holding both equity and longevity insurance. She is free to adjust her portfolio allocation of her financial wealth as well as of the annuity over time, and she can purchase variable payout annuities any time and incrementally. In this setting, we show that the retiree will not fully annuitize even without bequests; rather, she will combine variable annuities with withdrawals from her liquid financial wealth so as to match her desired consumption profile. Optimal stock exposures decrease over time, both within the variable annuity and the withdrawal plan. Welfare gains from this strategy can amount to 40% of financial wealth, depending on risk parameters and other resources; additionally, many retirees will do almost as well as the fully optimized outcome if they hold variable annuities invested 60/40 in stocks/bonds.

Government-sponsored inquiries into trustee competence, and legislation regarding the protocols and practice of trustee decision making, have raised questions about the competence of trustees to make investment decisions consistent with the long-term interest of defined benefit pension plan beneficiaries. In this paper, we report the results of an analysis of trustee competence in solving problems relevant to their investment responsibilities. Based upon a set of widely recognized problems drawn from the psychology literature, we assess their discount functions, their willingness to risk their own money and others' money, their appreciation of probability, and their use of evidence to solve problems. For comparison, where appropriate we report the results of the same testing regime applied to a group of Oxford undergraduates. Our goals are fourfold: first, to demonstrate the nature of trustee competence in decision making; second, to demonstrate the range of trustee responses to problems relevant to investment; third, to assess trustees' risk appetites in relation to their own and others' money; and fourth, to draw implications from these results for the governance of trustee boards and their relationships with advisers and service providers. It is shown that trustee competence is surprisingly heterogeneous, and the lack of common approaches to problems relevant to investment practice has significant implications for fund governance.

An important research programme in the social sciences concerns the theory and practice of individual decision-making under conditions of risk and uncertainty. At the same time, it is apparent that western governments increasingly rely upon individuals to plan and maintain savings programmes to meet their income aspirations: the long-term retirement income of those outside of the welfare state depends a great deal on the competence and consistency of individual decision-making. In this paper, we use a set of problems requiring the same techniques of judgement to test the consistency of trustee decision-making. Respondents were a group of trustees drawn from select UK defined benefit pension plans compared with a larger group of Oxford undergraduates. It was found that many respondents were inconsistent across related problems requiring the application of probabilistic judgement. It is also shown that trustees were more consistent than many undergraduates and it appears that trustee education and professional qualifications can make a positive difference to consistent decision-making. A more challenging test that depends upon understanding the relationship between demographic ageing, immigration, and the financing of pay-as-you-go social security suggests that substantive knowledge and consistency of judgement are crucial components of expertise. Implications are drawn for the trustee institution and the wider debate over the role and significance of individual decision-making with respect to income aspirations.

The Dutch pension system is highly ranked on adequacy. These rankings, however, are based on fictitious replacement rates for median income earners. This paper investigates whether the Dutch pension adequacy is still high when we take into account the resources that people really accumulate, using a large administrative data set. A comprehensive approach is followed: not only public and private pension rights, but also private savings and housing wealth are taken into account. Summed over all age- and socioeconomic groups we find a median gross replacement rate of 83% and a net replacement rate of 101%. At retirement age, 31% of all households face a gross replacement rate that is lower than 70% of current income. Public and occupational pensions each account for more than 35% of total pension annuities. Private non-housing assets account for 14% and imputed rental income from net housing wealth accounts for about 10%. Some vulnerable groups, such as the self-employed, have below average replacement rates. Results are fairly similar to results found in the UK, indicating that we should be careful in evaluating the adequacy of pensions systems on the basis of fictitious replacement rates.

We explore whether investors who are more financially knowledgeable earn more on their retirement plan investments compared with their less sophisticated counterparts, using a unique new dataset linking administrative data on investment performance and financial knowledge. Results show that the most financially knowledgeable investors: (a) held 18% points more stock than their least knowledgeable counterparts; (b) could anticipate earning 8 basis points per month more in excess returns; (c) had 40% higher portfolio volatility; and (d) held portfolios with about 38% less idiosyncratic risk, as compared with their least savvy counterparts. Our results are qualitatively similar after controlling on observables as well as modeling sample selection. We also examine portfolio changes to assess the potential impact of the financial literacy intervention. Controlling on other factors, those who elected to take the financial literacy survey boosted their equity allocations by 66 basis points and their monthly expected excess returns rose by 2.3 basis points; no significant difference in volatility or non-systematic risk was detected before versus after the survey. While these findings relate to only one firm, we anticipate that they may spur other efforts to enhance financial knowledge in the workplace.

This paper presents a model of a public pension fund's choice of portfolio risk. Optimal portfolio allocations are derived when pension fund management maximize the utility of wealth of a representative taxpayer or when pension fund management maximize their own utility of compensation. The model's implications are examined using annual data on the portfolio allocations and plan characteristics of 125 state pension funds over the 2000–2009 period. Consistent with agency behavior by public pension fund management, we find evidence that funds chose greater overall asset – liability portfolio risk following periods of relatively poor investment performance. In addition, pension plans that select a relatively high rate with which to discount their liabilities tend to choose riskier portfolios. Moreover, consistent with a desire to gamble for higher benefits, pension plans take more risk when they have greater representation by plan participants on their Boards of Trustees.

Social Security benefits may be commenced at any time between ages 62 and 70. As individuals who claim later can, on average, expect to receive benefits for a shorter period, an actuarial adjustment is made to the monthly benefit to reflect the age at which benefits are claimed. We investigate the actuarial fairness of that adjustment in light of recent improvements in mortality and historically low interest rates. We show that delaying is actuarially advantageous for a large number of people, even for individuals with mortality rates that are twice the average. At real interest rates closer to their historical average, singles with mortality that is substantially greater than average do not benefit from delay, although primary earners with high mortality can still improve the present value of the household's benefits through delay. We also investigate the extent to which the actuarial advantage of delay has grown since the early 1960s, when the choice of when to claim first became available, and we decompose this growth into three effects: (1) the effect of changes in Social Security's rules, (2) the effect of changes in the real interest rate, and (3) the effect of changes in life expectancy. Finally, we quantify the extent to which the gains from delay can be expected to increase in the future as a result of mortality improvements.

We compare levels of financial literacy between the general adult population of New Zealand, people of Māori ethnicity, and people of Ngāi Tahu, a Māori tribe that is providing financial education to its members. While the level of financial knowledge of Māori people is generally lower than for non-Māori (controlling for demographic and economic factors), there is little difference between the financial knowledge of the people of Ngāi Tahu and other New Zealanders. Moreover, we find that financial literacy is not significantly associated with planning for retirement. This could reflect the dominant role of New Zealand's universal public pension system in providing retirement income security.

In response to population aging, pay-as-you-go pensions are being reduced in almost all developed countries. In many countries, governments aim to fill the resulting gap with subsidized private pensions. This paper exploits the recent German pension reform to shed new light on the uptake of voluntary, but heavily subsidized private pension schemes. Specifically, we investigate how the uptake of the recently introduced ‘Riester pensions’ depends on state-provided saving incentives, and how well the targeting at families and low-income households works in practice.

We show that, after a slow start, private pension plans took off very quickly. While saving incentives were effective in reaching parents, they were less successful in attracting low-income earners, although Riester pensions exhibit a more equal pattern by income than occupational pensions and unsubsidized private pension plans.

We also provide circumstantial evidence on displacement effects between saving for old-age provision and other purposes. Households who plan to purchase housing are less likely to have a Riester pension. The same holds for households who attach high importance to a bequest motive. Occupational pensions and other forms of private pensions, however, act as complements rather than as substitutes.

Increasingly, individuals are being required to take more responsibility for their own retirement saving. Lifecycle theories of resource allocation provide a framework to examine work, retirement, consumption, and saving decisions. However, optimal decision making requires adequate knowledge of financial mathematics, risk and return properties of investments, and expectations concerning wage growth and tax policy. This paper explores the response of individuals to financial education seminars. Using data from three surveys of participants in seminars offered by TIAA-CREF, we estimate changes in retirement goals and saving behavior after the respondents have attended a seminar which discusses keep components of saving for retirement. The results indicate that financial education can produce significant changes in how individuals think and plan for retirement. Throughout the analysis, women were found to be more responsive to the seminar and were more likely to raise their desired retirement age, increase their target income replacement goal, and alter their savings behavior.

The present paper considers a retiree of a certain age who is endowed with a certain amount of wealth and is facing alternative investment opportunities. One possibility is to buy a single premium immediate (participating) annuity-contract. This insurance product pays a life-long pension payment of a certain amount, depending e.g. on the age of the retiree, the operating cost of the insurance company and the return the company is able to realize from its investments. The alternative possibility is to invest the single premium into a portfolio of mutual funds and to periodically withdraw a fixed amount that is assumed to be equivalent to the consumption stream generated by the annuity. The particular advantage of this self-annuitization strategy compared to the life annuity is its greater liquidity and the possibility of leaving money for heirs. However, the risk of self-annuitization is to outlive the assets before the uncertain date of death. The risk can thus be specified by considering the probability of running out of money before the uncertain date of death. The determination of this personal probability of consumption shortfall with respect to German insurance and capital market conditions is the objective of this paper.

Responsible for the welfare of beneficiaries, pension funds have many tasks and functions. Consequently, their governance and regulation are issues of public concern with direct bearing on the interests of stakeholders and ultimately the performance of Anglo-American financial markets. Subject to common law expectations regarding proper trustee behaviour, also important are statutory requirements regarding the equitable treatment of beneficiaries and the management of assets and liabilities. At one level, discretion is an essential attribute of the trust institution – trustees act on behalf of others not so well placed to manage their own long-term welfare because of lack of knowledge and/or ability. At another level, pension funds are presumably regulated by a well-defined purpose – the welfare of beneficiaries. In this paper, I look at the internal governance of pension funds emphasizing codes of practice, the rules and procedures for decision making, and trustee competence and expertise. While it is important to observe codes of conduct like those advocated by the OECD, there may be significant problems with any system of governance that relies upon rules and procedures. Inertia rather than innovation may be the net result. These issues are developed with reference to defined benefit and defined contribution schemes (and their variants). Ultimately, pension fund governance reflects, more often than not, its nineteenth-century antecedents rather than the financial imperatives of the twenty-first century.

The solvency crisis in 2001–2004 urged Dutch pension funds to reconsider their final-pay plans with de facto unconditional indexation. Most pension funds switched to an average-wage plan with solvency-contingent indexation. This pension plan redesign was the outcome of a new compromise between the major stakeholders of Dutch pension funds. The redesign is of interest as it results in a hybrid combination of DB and DC. This new setting indeed greatly improves solvency risk management. Moreover, the new plan structure appears to be welfare-dominant compared to other collective plan settings and individual alternatives, as it improves the conditions for intergenerational risk sharing. However, drawbacks of the new plans are the lack of transparency and potential welfare loss for individuals because of the inherent contingent claim structure of the new plan. Moreover, the plan redesign has led to value redistribution from older to younger plan participants.

National defined contribution pension systems have long been a mainstay of retirement income in Asia. One of the oldest and best known of these systems is the Singaporean Central Provident Fund, a mandatory retirement scheme managed by the central government for almost a half-century. With required contribution rates that have ranged up to 50%, this program has powerfully shaped asset accumulation patterns and housing portfolios. This paper explores how the structure and design of the Singaporean retirement and housing schemes influence wealth levels and asset mix at retirement. Our model indicates that outcomes rest critically on the interlinked national retirement and housing programs. We show that policies to enhance one program may boost retirement replacement rates but can also lower total wealth in unexpected ways. The lessons we draw may serve as guidance for other countries constructing a national defined contribution retirement system.

Plan knowledge and trust in financial institutions – two variables missing from standard neoclassical or behavioral models of decision-making – are strongly correlated to 401(k) savings behavior based on results from this paper. In voluntary enrollment settings, plan knowledge and demographic characteristics are related to participation in a 401(k) plan. In automatic enrollment settings, trust in financial institutions and knowledge of an available plan match are related to participation. Although this study cannot prove causality of the relationships, it does extend our understanding of the complex factors underlying savings choices. Policy implications are discussed.

A new explanation for the well-known reluctance of retirees to buy life annuities is due to Milevsky and Young (2002, 2003): Since the decision to purchase longevity insurance is largely irreversible, in uncertain environments a real option to delay annuitization (RODA) generally has value. Milevsky and Young analytically identify and numerically estimate the RODA in a setting of constant relative risk aversion. This paper presents an extension to the case of HARA (or GLUM) preferences, the simplest representation of a consumption habit. The precise date of annuitization can no longer be ascertained with certainty in advance. This paper derives an approximation whereby the agent precommits. The effect of increasing the subsistence consumption rate on the timing of annuity purchase is similar to the effect of increasing the curvature parameter of the utility function. As in the CRRA case studied by Milevsky and Young, delayed annuitization is associated with optimistic predictions of the Sharpe ratio and divergence between annuity purchaser and provider predictions of mortality.

We describe the pension plan features of the states and the largest cities and counties in the U.S. Unlike in the private sector, defined benefit (DB) pensions are still the norm in the public sector. However, a few jurisdictions have shifted toward defined contribution (DC) plans as their primary savings plan, and fiscal pressures are likely to generate more movement in this direction. Holding fixed a public employee's work and salary history, we show that DB retirement income replacement ratios vary greatly across jurisdictions. This creates large variation in workers’ need to save for retirement in other accounts. There is also substantial heterogeneity across jurisdictions in the savings generated in primary DC plans because of differences in the level of mandatory employer and employee contributions. One notable difference between public and private sector DC plans is that public sector primary DC plans are characterized by required employee or employer contributions (or both), whereas private sector plans largely feature voluntary employee contributions that are supplemented by an employer match. We conclude by applying lessons from savings behavior in private sector savings plans to the design of public sector plans.

Projected demographic changes in industrialized and developing countries vary in extent and timing but will reduce the share of the population in working age everywhere. Conventional wisdom suggests that this will increase capital intensity with falling rates of return to capital and increasing wages. This decreases welfare for middle aged asset rich households. This paper takes the perspective of the three demographically oldest European nations – France, Germany and Italy – to address three important adjustment channels to dampen these detrimental effects of aging in these countries: investing abroad, endogenous human capital formation, and increasing the retirement age. Our quantitative finding is that endogenous human capital formation in combination with an increase in the retirement age has strong implications for economic aggregates and welfare, in particular in the open economy. These adjustments reduce the maximum welfare losses of demographic change for households alive in 2010 by about 2.2 percentage points in terms of consumption equivalent variation.

Many economists and policy-makers argue that households do not save enough to maintain an adequate standard of living during retirement. However, there is no consensus on the answer to the underlying question about what this standard should be, despite the fact that it is crucial for the design of saving incentives and pension systems. We address this question with a randomized survey design, individually tailored to each respondent's financial situation, and conducted both in the U.S. and The Netherlands. We find that adequate levels of retirement spending exceed 80% of working life spending for a majority of respondents. Minimum acceptable income replacement rates range from 95 to 45% across income quintiles in the U.S., and from 75 to 60% across income quintiles in The Netherlands. The smaller range in The Netherlands may in part reflect the much tighter income distribution there.

Policymakers seeking to design efficient and smoothly functioning pension systems for their aging workforces are beginning to acknowledge the key importance of administrative expenses when formulating rules for pension plan structure and fee disclosure requirements. This study explores the links between retirement plan offerings and pension expenses for a wide range of private and public sector pension plan types, using an invaluable new data set on two thousand Australian pension funds. Our analysis indicates how pension plan design can strongly influence plan expenses and consequently eventual retirement security.