As we noted in our introduction to the first issue of the Journal, the mission of the journal is to serve as a forum for the international debate on pension provision. We are therefore keen as the Editors that the articles and ideas discussed in each issue are made accessible to as broad an audience as possible. This ‘Overview’ will introduce each issue, reviewing what the editors view as the main results and context for each article.

This is the final issue of the first volume of the Journal of Pension Economics and Finance. We are pleased that the Journal has had a very successful first year, both in terms of the quality of submissions and in terms of building up an extensive and high quality subscription base. We will report in more detail on our first year as well as our plans for the future in the first issue of the second volume.

The four articles in this issue span a broad range of topics. The first article is by David McCarthy (Oxford University, Institute of Ageing), Olivia Mitchell (University of Pennsylvania, Pension Research Council) and John Piggott (University of New South Wales, Centre for Pensions and Superannuation) who have written a paper entitled: Asset rich and cash poor: retirement provision and housing policy in Singapore.

As mandatory defined contribution systems are increasingly adopted around the world, the experience in Singapore is particularly relevant in that its Central Provident Fund (CPF) is one of the oldest major international examples of a mandatory defined contribution pension system. With funds representing roughly 60% of Singapore's GDP, the CPF is also one of the most prominent publicly managed investment funds in the world.

The particular focal point of the McCarthy et al. paper is the effect of rules in Singapore which allow individuals to use their accumulated funds to pay for housing. The use of retirement savings vehicles for approved purposes, such as medical care, education and unemployment, is an important policy issue, with most countries continuing to have strict prohibitions on drawing funds prior to retirement.

The next few decades will be a period of rapid demographic change that will present significant challenges to both public and private pension systems. In the next five decades, reasonably conservative estimates are that the proportion of the population aged over 65 in the developed world will roughly double. This shift in the age structure of the population will naturally create wide-ranging economic and political strains, particularly where pension provision relies extensively on pay-as-you-go systems that are inherently sensitive to demographic change.

In addition to stress caused by a shift in the age structure of the population, low fertility experience of many countries, particularly in continental Europe, will lead to substantial declines in the working age population in the next couple of decades. A decline in the availability of workers will pose challenges for firms who are likely to be under increasing pressure to attract and retain key workers. These pressures could lead to a growth in employer-provided pensions.

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.

The paper estimates the impact of social security reform – specifically, the transition from a purely public pay-as-you-go (PAYGO) system to one with private individual retirement accounts – on the share of the workforce that contributes to formal retirement security systems. Using a simple model of a segmented labor market, the paper exploits variation in data from a panel of eighteen Latin American countries, observed from 1980 to 1999. Results show a positive incentive effect after the introduction of individual retirement accounts that, ceteris paribus, increases the share of the economically active population who contribute to the reformed system. However, this takes place only gradually as employers and workers become familiar with the set of new social security institutions that reforms put in place.

Reformed public DC plans typically contain a minimum benefit guarantee (DC-MB). This paper explores risk management techniques to control the cost of these guarantees in DC systems with minimum benefit guarantees (DC-MB). The paper finds two approaches are particularly useful. The first approach borrows an idea from the recent catastrophic insurance literature. The guarantee is placed over a ‘standardized’ portfolio, requiring agents to accept any ‘basis risk’ if they chose a non-standard portfolio. However, for large conversions from DB to DC-MB plans, in which there is little or no DB benefit remaining, the government must still worry about any ‘implicit guarantee’ that might extend beyond the standardized portfolio which might entice agents to accept a lot of basis risk (a ‘Samaritan's Dilemma’). The second method, therefore, uses a more brute force approach: private portfolio returns in the good states of the world are taxed while returns in the bad states are subsidized. Both options are very effective at controlling guarantee costs, and they can be used separately or together. Calculations demonstrate that all of the unfunded liabilities associated with modern pay-as-you-go public pension programs can be eliminated under both approaches even at a modest contribution rate.

Social Security is a financial asset whose ‘purchase’ is compulsory for most working individuals. This paper shows that the return on Social Security during the individual's working lifetime is related to the rate of change of aggregate labor income. If an individual's labor income is strongly related to aggregate labor income, then the Social Security asset is a particularly unattractive asset. In this situation, the individual would benefit from a reformed Social Security system that would permit investment of retirement funds in other financial assets. This paper investigates how this aspect of Social Security risk varies across groups of individuals who differ according to gender; education; race; and age. The main finding is that there are important differences across groups in this component of Social Security risk, as captured by the sensitivity of individual-level income growth to changes in the SSWI. This element of risk is most important for women, especially women who are young-to-middle aged and with more education. This analysis suggests that women would have more to gain, compared with men, from a reformed Social Security system.

Some retirement plans allow the participant to choose how funds are invested. Having to direct investments may provide the participant with financial education. This paper finds that U.S. households covered by pension plans in which the employee chooses investments are significantly more apt to hold stock outside of their retirement plan than are households with pension plans offering no such choice. The effect of investment choice upon non-pension asset allocation is not explained by portfolio rebalancing or observable differences in income and saving preferences across households. This provides some evidence that the design of a pension plan may influence an employee's financial decisions outside of the pension plan, although unobserved heterogeneity in worker's preferences could also explain the result.

As one possible solution to the well-known financing crisis of unfunded social security systems, an increase in the retirement age is a popular option. To induce workers to retire later, it has been proposed to strengthen the link between retirement age and benefit level. The present paper is devoted to analyzing the long-run financial implications of such a reform. We show that with actuarial adjustments the long-run contribution rate is an increasing function of the retirement age chosen by workers. Moreover, the implicit tax paid to the pension system by a participant can increase in the long run if the retirement age rises in response to a ‘steep’ adjustment rule. In this sense, the proposed ‘cure’ may worsen the disease. Finally, we show how the negative effects can be avoided by forming a capital stock from the additional revenues due to later retirement.

This paper develops and estimates a model for the bonus-crediting mechanism in relation to with-profits policies issued by Danish life insurance and pension companies. The market for pension and life insurance savings contracts is generally highly opaque, but our proposed model explains a significant part of the variation in actual bonus distribution by Danish market participants. The main determinant of bonus policy is a measure of the degree of solvency which we construct from a unique data set that contains information compiled from several public as well as non-public sources. The data set spans the ten-year period from 1991 to 2000 and the model is estimated by way of maximum likelihood.

Using data from the 1998 Survey of Consumer Finances, this paper examines the impact of dual private pension households on the distribution of household wealth in the United States. This paper builds on three lines of previous research: inquiries into ‘assortative mating’, i.e., the tendency for people with similar characteristics to marry; studies emphasizing the importance of pensions as a component of household wealth; and recent research examining how wives' earnings alter the distribution of household income. Evidence of ‘assortative private pensions’, i.e., the tendency for people with private pensions to be married to people with private pensions, is presented. Estimates of the expected value of private pension and social security wealth are added to measures of household non-retirement net worth to obtain the value household wealth. These data indicate that wives' private pensions in dual private pension households contribute marginally to greater equality in the wealth distribution.

Like most countries, China faces a rapidly aging population and a looming social security crisis. Prefunding and unifying a fragmented system are at the heart of the government's projected reforms that are intended to prevent this crisis. The Chinese plan to set up individual accounts to deal with these problems is retarded by three key factors:

1 transition costs must be covered in any move toward prefunding, and the Chinese government is still trying to figure out how to accomplish this;

2 the current social security system is characterized by fragmentation and decentralized administration, which lead to principal–agent/ moral hazard issues that make it more difficult to cover transition costs, decrease early retirement and increase compliance;

3 the funds that have accumulated have not been invested in diversified portfolios by competitive management and have not earned a high rate of return.

This paper focuses on these three problems as well as the complex interactions between pension, financial market and state-owned enterprise (SOE) reform. We summarize the bold steps that the government has announced during second half of 2001 to link pension, financial market and SOE reform.

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.

This paper examines the rationale, nature and financial consequences of two alternative approaches to portfolio regulations for life insurers and pension funds, namely prudent person rules and quantitative portfolio restrictions. The argument draws on the financial-economics of investment and the differing characteristics of institutions' liabilities, as well as evidence drawn from major OECD countries. The overall conclusion is that prudent person rules are superior to restrictions, particularly for pension funds, except in certain circumstances that may hold temporarily in emerging market economies.

During the past twenty years, swap contracts have become key financial ‘adapters’ linking diverse national financial systems to the global financial network. Today banks and investment companies around the world use swaps extensively to manage their currency, interest-rate, and equity-market risks and to lower their transaction costs. Yet pension funds, which have grown rapidly over that same 20-year period, hardly use swaps at all. This paper suggests how pension funds could use swaps to achieve the risk-sharing benefits of broad international diversification and hedging while avoiding the ‘flight’ of scarce domestic capital to other countries. The paper also shows how swaps can be used to lower the risks of expropriation and to lower the other transaction costs of investing in other countries.