This paper introduces a continuous-time allocation model for an investor facing stochastic liability commitments indexed with respect to inflation. In the presence of funding ratio constraints, the optimal policy is shown to involve dynamic allocation strategies that are reminiscent of portfolio insurance strategies, extended to an asset–liability management (ALM) context. Empirical tests suggest that their benefits are relatively robust with respect to changes in the objective function and the introduction of various forms of market incompleteness. We also show that the introduction of maximum funding ratio targets would allow pension funds to decrease the cost of downside liability risk protection.

Sponsors of defined contribution plans often hire financial advisors to help them design and monitor their plans. I find that advisors have a significant impact on the menu of investment options of their clients’ plans. Clients of the same advisor tend to hold the same funds and fund families. They also tend to delete and add the same funds. Advisors’ plans are similar to their clients’ plans in that they tend to hold identical funds, use the same fund families, and fund categories. Thus, to a large extent, advisors take their own advice. However, funds that are in clients’ plans but not in their advisors’ plans have higher expense ratios than the funds held by advisors. Since advisors’ compensation is often tied to the expense ratio of their clients’ funds, this pattern is consistent with misaligned incentives on the part of advisors and their clients.

Choices regarding the disposition of wealth at retirement can have substantial implications for retirement income security. We analyze the factors determining annuity payout option choices within the context of a public sector defined pension plan with no default annuity option. Using combined administrative records and survey data, we explore the role of individual and household characteristics as well as risk preferences, time preferences, and financial literacy. We also document retiree well-being and satisfaction with retirement decision making. The evidence is consistent with predictions over which households might benefit most from each annuity option. Comparing retirees who chose different types of annuities, we find that these groups of retirees report very different levels of well-being in retirement. All retirees report lower levels of retirement income security over time, with strong differences among those who chose different types of annuities.

In the wake of the economic downturn of 2008–2009, researchers and policymakers have focused considerable attention on the extent of unfunded liabilities in US public sector pension plans and the implications for the long term fiscal sustainability of state and local governments. In response to the growth in liabilities, many states have introduced legislation that cuts back on defined benefit (DB) plan commitments, in some cases even shifting the pension system from a DB to a defined contribution or hybrid plan. This paper explores the factors that have led states to engage in pension reform, focusing particular attention on one factor that has only recently gained attention in the research literature: contribution volatility. While unfunded liabilities have significant long-term solvency implications, in the short term fluctuations in the amount of required contributions pose substantial difficulties for the ability of plan sponsors to balance budgets and engage in strategic planning. We begin by quantifying the volatility in the required contributions US states were expected to make between 2001 and 2013 and comparing the volatility of pension spending to other relevant tax and spending measures. Next, we describe the various types of pension reforms that states have implemented and examine the fiscal pressures facing those states that have engaged in reform. States with greater fluctuations in their required payments have been more likely to reduce benefits and increase employee contributions; they have also been more likely to institute these reforms sooner.

This paper investigates the consequences of relying on assets accumulated in a defined contribution pension plan compared to an annuity based on salary from a defined benefit plan. Although a defined contribution plan varies with asset returns, it may be more desirable than a defined benefit plan when wage variability and job turnover are adequately considered. It is found that both job separation rates and wage variance increased in the 1990s. The new calibrations of these variables are used in a life-cycle model where a worker chooses between a defined benefit and a defined contribution plan. It is shown that the increase in job turnover made defined contribution the dominant pension plan.

We estimate how raising the statutory retirement age affects employment by considering the pension age reform in Estonia, that gradually raised the normal retirement age (NRA) for women from 58 to 61.5 and the early retirement age (ERA) from 56 to 59.5 during the period of 2001–2011. The analysis employs a difference-in-differences estimation strategy on register data covering women born between 1943 and 1952. The reform did have an impact on the employment rate of affected women, with an estimated increase of 4.1 percentage points associated with the rise in the NRA, and 3.4 percentage points with the rise in the ERA. These estimates are at the lower end of those found in previous studies for other countries, pointing to the role of contextual features such as lower replacement rates and fewer disincentives to work while drawing pensions.

This study provides empirical evidence on the mechanisms through which financial literacy may be associated with saving for retirement, in the three phases of the decision-making process – information perception, information search and evaluation, and decision-making and implementation. The results indicate that financial literacy has significantly positive effects on one's awareness of post-retirement financial needs, comparing alternatives when purchasing financial products, displaying fewer present-time bias, and planning for and setting aside funds for retirement. Financial literacy not only directly contributes to planning for the future, but also indirectly via a reduction in behavioral biases.

This paper analyzes the effect of private supplementary pensions (and the tax reliefs that aim to stimulate such plans) on national saving in Spain. It tries to test the alleged positive effects of private pension plans on savings. Using a longitudinal dataset and fixed-effects methods, we find that tax-favored contributions to a pension fund are not associated with a lower consumption level, which implies that this policy does not increase national saving. The empirical results on the impact of contributions on private household wealth are less clear.

Compared with large institutional pension funds, there is relatively little published research on small funds, which are defined in the Australian superannuation legislation as pension funds with less than five members. Small funds account for more than 20% of total pension assets and they are one of the fastest growing sectors and therefore play a significant part in the savings strategy for national retirement income. This paper contributes to the needed research by analysing the more granular audited accounting data collected for the subset of small funds regulated by the Australian Prudential Regulation Authority (APRA) over the last few years. The analysis provides new insights into the operating costs involved in running the funds, the investment performances and portfolio compositions of Small APRA Funds (SAF).

The UK's defined benefit pensions industry makes widespread use of pooled investment vehicles which are provided by a large number of fund management groups. In this paper, we provide the first comprehensive performance analysis of these funds. Using data on 734 actively managed pooled funds that had a combined value of just over £400bn at the end of 2007, ranging from UK equity to funds specialising in Pacific Basin equities, our results indicate that the performance of these institutional funds is generally better than those reported in the literature for managers of mutual funds. Nevertheless, with increasing numbers of UK fund managers purporting to be able to provide high alpha products to the UK's beleaguered pensions industry our results do not give us great confidence that the solution to the widespread deficits of the UK's pension fund industry lies in the hands of these active fund managers.

Financial economics holds that payment streams should be valued using discount rates that reflect the cash flows’ risks. In the case of pension liabilities, the appropriate discount rate for a pension fund's liabilities is the expected rate of return on a portfolio that would be held under a liability-driven investment policy. The valuation of defined benefit pension obligations involves choices revolving around deciding: (1) what future benefit payments to recognize today (i.e., which liability concept to use); and (2) from whose point of view to value the liabilities. Moving towards modeling, the distribution of future liabilities using a ‘risk-neutral’ framework, would allow for calculating the present value of the future liabilities more accurately. This would provide policymakers with information more relevant for the decision-making, and it would also permit easier communication of the risks facing the Pension Benefit Guaranty Corporation's PIMS model via a single univariate statistic.

This paper explores a notional defined contribution (NDC) approach aimed at helping pensioners to cope with the cost of long-term care (LTC). It develops the necessary technicalities to fully integrate an LTC benefit, graded according to the annuitant's degree of disability, into a generic NDC retirement framework with a minimum pension benefit for both contingencies. It also discusses the policy implications of various issues that should be taken into account before any decision is made to put the model into practice. Finally, to enable policymakers to better understand how the proposal would function, the paper includes a realistic numerical example.

We estimate the portfolio effect of changes in social security wealth exploiting a decade of Italian pension reforms. The Italian Survey of Household Income and Wealth records detailed portfolio data and elicits expectations of retirement outcomes, thus allowing us to measure expected social security wealth and assess to what extent Italian households perceive the innovations brought about by the reforms. We find that households have responded to cuts in pension benefits mostly by increasing real estate wealth, and that this response is stronger among households able more accurately to estimate future social security benefits. We also compute that for the average household consumable wealth increases by 40 percent of the reduction in social security wealth.

We compute minimum nominal funding ratios for defined-benefit (DB) plans based on the expected utility that can be achieved in a defined-contribution (DC) pension scheme. Using Monte Carlo simulation, expected utility is computed for three different specifications of utility: power utility, mean-shortfall, and mean-downside deviation. Depending on risk aversion and the level of sophistication assumed for the DC scheme, minimum acceptable funding ratios are between 0.87 and 1.20 in nominal terms. For relative risk aversion of 5 and a DC scheme with a fixed-contribution setup, the minimum nominal funding ratio is between 0.87 and 0.98. The attractiveness of the DB plan increases with the expected equity premium and the fraction invested in stocks. We conclude that the expected value of intergenerational solidarity, providing time-diversification to its participants, can be large. Minimum funding ratios in real (inflation-adjusted) terms lie between 0.56 and 0.79. Given a DB pension fund with a funding ratio of 1.30, a participant in a DC plan has to pay a 2.7 to 6.1% point higher contribution on average to achieve equal expected utility.

This paper shows that the capital market effects of population aging and pension reform are particularly strong in continental European economies such as France, Germany, and Italy. Reasons are threefold: these countries have large and ailing pay-as-you-go public pension systems, relatively thin capital markets and less than benchmark capital performance. The aging process will force the younger generations in these countries to provide more retirement income through own private saving. Capital markets will therefore grow in size and active institutional investors will become more important as intermediaries. The aim of this paper is to show that these changes are likely to generate beneficial side effects in terms of improved productivity and aggregate growth.

As a result of the two severe stock market declines since 2000, there has been a steady debate about the affordability of state and local public pension benefits. We measured the affordability of pension benefits in terms of governments’ ability to make the required contributions based on existing tax and revenue bases. We conducted a historical analysis of government pension contributions at national and state level over a 20-year period 1992–2011 and found that the real pension burdens have increased over this period. We also found substantial variation in pension burdens among the 50 states. The results of our empirical analysis showed that employee contribution share, investment return, size of the public workforce, and pension benefit level had significant effects on pension burdens. Based on these findings, we proposed several strategies for reducing pension burdens, including increasing employee pension contribution, reducing size of workforce, and improving pension investment performance.

Government authorities use resources on information campaigns in order to inform citizens about relevant policy changes. The motivation is usually that individuals sometimes are ill-informed about the public policies relevant for their choices. In a survey experiment where the treatment group was provided with public information material on the social security system, we assess the short- and medium-term knowledge effects. We show that the short run effects of the information on knowledge disappear completely within 4 months. The findings illustrate the limits of public information campaigns to improve knowledge about relevant policy reforms.

Many organizations have either already terminated their defined benefit (DB) plans or are thinking about it, in order to offload the financial and regulatory risks these programs pose. But plan sponsors should think carefully about how their decision might affect their workers' commitment and productivity – and ultimately their organization's success.

To answer those and other retirement questions, Watson Wyatt set out to learn how DB and defined contribution (DC) plans affect employees' workforce behavior and decisions. Watson Wyatt's Retirement Attitude Survey (WWRAS) found that, while most workers value both types of plans very highly, workers with DB plans generally appreciate their retirement programs significantly more than those with only a DC plan. This was particularly the case for those with a hybrid pension plan. This analysis found that retirement plan generosity and effective communication strongly affect a plan's perceived value to employees. This has important implications for plan sponsors, since greater plan appreciation is strongly linked to employee commitment. In fact, we found that workers covered by a defined benefit plan express a very strong commitment to their current employer, while DC plan coverage has no effect on employee commitment. This is partly owing to a selection effect, whereby firms with DB plans tend to attract more committed workers. However, even after controlling for the selection effect, DB plans exert an independent effect on the likelihood that employees will stay with their employer.

Target-date funds in corporate retirement plans grew from $5 billion in 2000 to $734 billion in 2018, partly because federal regulation sanctioned these as default investments in automatic enrollment plans. We show that adopters delegated pension investment decisions to fund managers selected by plan sponsors. Inclusion of these funds in retirement saving menus raised equity shares, boosted bond exposures, curtailed cash/company stock holdings, and reduced idiosyncratic risk. The adoption of low-cost target-date funds may enhance retirement wealth by as much as 50% over a 30-year horizon.

We investigate the impact of receiving a public pension on total expenditures, food expenditures, and private transfers of the elderly in South Korea. Using a natural experiment that occurred in 1999, we are able to explore the impacts of a large public pension program expansion which newly incorporated people who had been self-employed, unemployed, and out of the labor force. We find that receipt of a public pension did not allow the elderly to increase total expenditures or food expenditures because the expansion of public pensions largely crowded out financial transfers from adult children and/or own siblings.