Pension Market Research Articles

Cross-Border Obstacles and Solutions for Pan-European Pensions

Pensions are currently at the top of the agenda of companies, employees, pension carriers, governments and, last but not least, the European Commission. This is partly because of the economic crisis pension funds are in right now but also because of the ageing population and the impact on public treasuries. These problems however cannot be solved easily. A well-functioning internal market for pan-European pensions without tax barriers can however contribute in solving the current pension crisis. In this article the authors describe the current situation and legislation regarding cross-border pension carriers and pension schemes within the EU. Since taxation is still one of the largest barriers for a well-functioning internal market for pension schemes, this aspect gets a lot of attention of the authors. They do not only describe current legislation and recommend changes; they also present a solution which is already being developed and is in line with current legislation: a multi-country tax-efficient pension scheme.

Pan-European pension funds: Current situation and future prospects

The competitive pressures arising from European economic integration increasingly challenge the territorial sovereignty of national welfare states. This generates the need to situate domestic social security schemes amid the European Union's national and supranational as well as economic and social spaces. At the trans-national level, the European Commission's 2003 Institutions for Occupational Retirement Provision (IORP) Directive created the illusion that a single market for occupational pensions would shortly be within reach. This did not happen, however, as IORPs — being at one and the same time financial vehicles and social insurance institutions — embody the constitutional asymmetry between policies promoting market efficiency and policies promoting social protection. Whereas the elimination of financial and tax barriers has proceeded smoothly, harmonization of the social and labour components within the occupational pension domain did not occur, slowing down the development of pan-European pension plans. Nonetheless the road towards a single occupational pension market is still open, with first positive results emerging from the greater involvement of corporate and supranational actors.

Defined Benefit Pension Sponsors & Market Prices after Pension Accounting Reform

I investigate whether the recognition of previously disclosed accounting items is associated with a change in market valuation after Financial Accounting Standard (FAS) 158 requires defined benefit (DB) pension sponsors to recognize the net funded status (NFS). This question is especially relevant given the current debate whether regulators should require the recognition of operating leases. I investigate whether the NFS reflects economic information that is used in the valuation process. I find that sponsors of underfunded DB plans are associated with higher valuation after the NFS is recognized, consistent with a reduction in investors’ estimation risk. I find that the cost of capital of non DB sponsors increases by 70 basis points more than it does for DB sponsors in the post period, perhaps attributable to increased financial reporting transparency after the recognition event. My inferences are stronger when I incorporate the effect of analyst following into my estimation model.

Performance Measurement of Pension Strategies: A Case Study of Danish Life Cycle Products

The Danish pension market of life cycle products have expanded considerably since its introduction in the beginning of the millennium. The market is maturing and pensioners have the choice between a wide area of different products. It is therefore about time that financial insurance technology is developed to guide the performance measurement of available products. In this paper we develop a simple first version of such a method and we investigate life cycle products recommended on the web of the four biggest commercial Danish pension companies on one day in February 2007. All considered products are outperformed by trivial benchmark products with constant stock proportion over time. Our approach is the following: for each life cycle product we first find a trivial benchmark product with the same long term risk and then we compare the long term return of the two equivalent products. We primarily consider value at risk and tail value at risk as risk measures, but we also include a study where the fair value of an interest guarantee is used as risk measure. We consider both long term mean returns and long term median returns. We hope that our new method will be regarded as a first step towards a scientifically based ranking of the quality of pension products.

The EU internal market for occupational pensions: Making further progress

Pension funds will play an important role in meeting a number of key challenges common to European Union (EU) Member States: ageing, fiscal sustainability, cost efficient and adequate pensions, flexible labour markets and financial stability. These issues need a much greater coherent policy approach over the next few years. The EU internal market for occupational pension funds, based on the Institutions for Occupational Retirement Provision Directive, can contribute. This would allow employers and employees to reap the benefits of scale and scope economies, risk diversification, lower transaction costs, innovation and more product choice.

Another Child? Fertility Ideals, Resources and Opportunities

Low fertility in most developed countries has prompted policy concern in relation to labour market supply, pensions, and expenditure on health and welfare services as well as policy debate about both the cost of children and the opportunity costs of parenthood. The extent to which family policy interventions can be effective in slowing or reversing fertility decline is much debated. This paper, based on a fertility module of the Scottish Social Attitudes Survey 2005, examines the current fertility, and ideal and expected fertility of a nationally representative sample of 455 parents of reproductive age and focuses on whether they plan to have another child. It compares the characteristics of those who intend to have another child with those who do not, and how parents with one child differ from those with more children. It addresses three questions about family size: (1) fertility ideals, (2) resources and the economic implications of childbearing, and (3) opportunities for childbearing and the effects of a late start on fertility expectations. It concludes that, despite a sustained period of low fertility in Scotland, childbearing ideals are robust and explanations of low fertility must derive from difficulties in realising those ideals. Difficulties in realising fertility aspirations are associated less with resources than with opportunities for childbearing, especially the timing of first birth. Those who delay their first birth are less likely to realise their ideal family size, and their lower fertility is associated with the opportunity costs of childbearing in terms of foregone qualifications, careers and earnings.

Pension Payouts in Chile: Past, Present, and Future Prospects

One of the most interesting features of the Chilean pension system is that approximately two-thirds of all retirees purchase annuities, resulting in annuitization rates much higher than in other countries. In this paper we review recent developments in the payout market for Chilean pensions, focusing particularly on the role of annuities, and we discuss what makes the payout market in Chile so different from those in other nations.

A two-account model of pension saving contracts

Saving contracts studied in the literature and available on the pension market share certain characteristics. An overview implies a unified formalization that exposes, at the same time, the common characteristics and the important differences. This article presents such a formalization in terms of two interacting accounts and specifies a series of examples from the literature and the market. We solve the valuation problem by derivation of a partial difference-differential equation and implementation of a numerical finite difference procedure. Illustrations are included.

Emerging trends in financial markets integration: the Indian experience

PurposeFinancial sector reform measures, which were initiated in 1991, have provided some degree of maturity and integration of different segments of India's financial markets. The purpose of this paper is to articulate the impact of financial sector reform measures on integration of various segments of financial markets in India.Design/methodology/approachThe paper surveys various methodologies for measurement of financial integration and uses the recently developed technique of co‐integration in a VAR framework to assess the extent of integration of various segments of India's financial markets.FindingsThe paper concludes that the financial market integration is inconclusive in India. Only a few segments of money market, Gilt market and foreign exchange market are integrated. Interest rate parity does not hold in India's case, which indicates poor evidence in support of international integration of domestic financial markets. Similarly, the analysis of the relationship between domestic saving and domestic investment does not support international integration. The study of co‐integration of Nasdaq and Bombay sensitive index (BSE), also revealed absence of international integration.Research limitations/implicationsOwing to non‐availability of time series data, the paper could not consider the mutual fund market, pension market and various derivatives markets in the overall process of assessment of financial integration. However, the impact on the findings is minimal, as these markets are not so far developed in India.Practical implicationsThe findings have significant practical implications particularly in the formulation of policies on management and interventions in the money market, foreign exchange and equity markets and in the overall formulation of monetary policy for the economy.Originality/valueThis paper presents a quite comprehensive research study on financial integration in India and is original, particularly in the area of application of the co‐integration technique for assessment of financial integration.

Sviptingar í fjárhag lífeyrissjóðanna

Viðfangsefni þessarar greinar er leit að skýringum þess að fjárhagur lífeyrissjóða hins almenna vinnumarkaðar snerist úr að vera mjög bágborinn í að vera svo sterkur að fá lönd standa Íslandi á sporði þegar kemur að lífeyriseignum mældum sem hlutfall af landsframleiðslu. Til skamms tíma hafa lífeyrissjóðirnir einnig almennt átt fyrir skuldbindingum sínum á tryggingafræðilegan mælikvarða. Fyrirfram má gera ráð fyrir að þættir eins og verðtrygging fjárskuldbindinga, góð ávöxtun eigna, aukið val um fjárfestingarkosti og þrenging á réttindum í samþykktum sjóða hafi ráðið úrslitum. Í ritgerðinni er fjallað um tryggingafræðilegar úttektir sem mælikvarða á fjárhagsstöðu lífeyrissjóða. Leidd eru rök að því að niðurstaða tryggingafræðilegra úttekta sé tiltölulega viðkvæm fyir breytingum á ávöxtunarkröfu, sem er hinn eiginlegi grundvöllur úttektanna. Varpað er ljósi á bága stöðu sjóðanna þangað til fjárhagur þeirra snerist við og grafist fyrir um skýringar á þeirri þróun. Leitt er í ljós að verðtrygging eigna sjóðanna hafi ráðið úrslitum í því efni. Sýnt er fram á sterka samleitni sem gætti í viðsnúningi á fjárhag sjóða hins almenna vinnumarkaðar um eða upp úr miðjum tíunda áratug 20. aldar. Loks er fjallað um áhrif efnahagshruns haustið 2008 á fjárhag sjóðanna.

Lietuvos socialinio draudimo pensijų dalinio privatizavimo tikslai ir rezultatai

Šiame straipsnyje analizuojama prieš penkerius metus pradėta Lietuvos socialinio draudimo senatvės pensijų struktūrinė reforma, kurios metu dalis socialinio draudimo įmokų pervedama į gyventojų pasirinktus privačius pensijų fondus. Šio straipsnio tikslas - apžvelgti reformos pradžioje jai keltus tikslus, įvertinti jų pagrįstumą socialinės apsaugos ekonomikos teorijos požiūriu, išanalizuoti pradinius pensijų reformos rezultatus. Siekiant šio tikslo išanalizuotas pensijų reformų regione pobūdis, socialinio draudimo pensijų dalinio privatizavimo Lietuvoje ypatybės, kelti privatizavimo tikslai ir besiformuojanti privačių pensijų rinką Lietuvoje. Straipsnyje remiamasi pasaulyje gerai žinomų pensijų ekonomikos tyrėjų publikacijomis, pensijų reformą reglamentuojančiais Lietuvos Respublikos įstatymais, Lietuvos valstybės institucijų skelbiama ekonomine ir socialine statistika.Autoriaus atlikta analizė rodo, kad privačių pensijų fondų klientų asmeninėse kaupiamosiose pensijų sąskaitose kaupiamo turto investicijų grąža nepadengia nuostolių, kuriuos jie patirs dėl dalinio pasitraukimo iš socialinio draudimo pensijų sistemos. Straipsnyje taip pat parodyta minėtos pensijų reformos našta, kuri tenka dabartiniams pensininkams. Pagrindinė straipsnio išvada - reformos tikslai buvo per daug ideologizuoti, o pirminiai rezultatai nepalankūs nei dabartiniams, nei būsimiems pensininkams. Lietuvoje 2004 metais įvykdytos pensijų reformos analizė akademinėje literatūroje pateikiama pirmą kartą.

Explaining German Selectivity Regarding European Union Pension Directives

ABSTRACTWhy do German policymakers support some aspects of a single European pension market, but not others? This article argues that the German government’s preferences towards European Union (EU) pension directives are best explained by combining historical institutionalism (HI) and domestic discourse analysis (DA). Each approach by itself is insufficient to account for the observed variation between 1991 and 2007. Arguments based on party ideologies offer less explanatory power. HI explains why all governments – Kohl, Schröder, and Merkel – protected employer-sponsored book reserve pensions, a cornerstone of Germany’s coordinated market economy, from the scope of EU directives. DA allows us to grasp how interests were reframed. While the status quo stance of the Kohl government succeeded in delegitimizing supporters of alternative pension security concepts, the Schröder administration imposed an economically efficient pension reform without much public support. The grand coalition, in turn, abandoned Chancellor Merkel’s initial plan to expand second-tier pensions in the light of rising pressures that the Left Party posed for the Social Democratic coalition partner.

Between labour market and retirement pension - flexible transition as a new paradigm for ageing societies?

Increasing the pensionable age due to rising life expectancy meets strong political resistance. For health and labour market reasons it will always be impossible for some to achieve full pension eligibility directly from employment. Even if early retirement options are not restricted the scope for an accumulation of earnings to fund an early pension is often narrowly defined. Consequently, it is impossible for early retirees to compensate for the reductions in the pension they receive. Contrary to the general tendency to increase the pensionable age an alternative reform proposal is currently under discussion in German social policy circles. This involves free choice of retirement at age 60; unlimited accumulation of additional pension entitlements whilst earning; actuarial deductions for early retirement; and consideration of life expectancy in making adjustments to pension awards. This solution relieves the public pension system financially, raises the attractiveness of senior citizens on the labour market, offers the opportunity for a self-determined transition from work to retirement and reduces political resistance to pension reform. The effect on the labour market for senior citizens remains to be examined.

Emerging Market Pension Funds and International Diversification

Many countries are currently increasing the advanced funding of their public pension systems to improve their sustainability in the face of rapidly aging populations. When pensions are funded, the issue of asset allocation becomes of paramount importance. Through compound interest, the rate of growth for pension fund assets will have enormous implications for the level of pension contributions that will be needed to fund a desired level of benefits. Standard portfolio selection theory provides a fundamental justification for international diversification: by widening the pool of potential assets, investors can potentially increase returns while possibly even reducing risks through the selection of complementary assets with low correlations. Nonetheless, many emerging market countries have regulations that strictly limit the choice of investments for pension funds, in some cases excluding international assets entirely. This paper seeks to determine what economic theory suggests is the optimal asset allocation for public pension systems in emerging market countries, and in particular, what role international assets play in the optimal portfolios. We find that on average, about half of the portfolios of emerging market countries should be in world assets. The paper then quantifies the costs of prohibiting international diversification.

Economic Interests and the Construction of a European Single Pension Market

This article asks why the EU member states were able to agree on an EU pension fund directive in 2003 whereas they had failed to do so in a previous attempt (1991). The main argument is that a single pension market was a desirable project before 2003, but bargaining inefficiencies prevented its realisation. This is because bargaining over integration in this sector requires credible signalling between Bismarckian and Beveridgean pension regimes. The co-ordination of divergent welfare and financial regimes depends on the ability of governments to send costly signals that only a limited range of outcomes are considered legitimate in their home state. In turn, the capacity to signal and the costs of bluffing hinge on international pressure for pension reform (Economic and Monetary Union) and the magnitude of changes governments have to make to their respective welfare finance arrangements.

When the welfare state meets the regulatory state: EU occupational pension policy

ABSTRACT The increasing relevance of occupational pensions for the income security of the elderly moves this policy area to the core of the tension between national redistributive welfare states and EU-wide single market regulations. Focusing on the European pension fund directive, the paper investigates whether European occupational pension policies are primarily shaped by the Commission's and international business agenda of market liberalization or the government preferences for national autonomy in social policy. The study finds that the directive liberalizes the pension market to some extent. Member states largely succeeded in securing the national prerogative in social policy. In explaining this outcome, the paper argues that the nature of domestic pension arrangements not only shapes government preferences but also the preferences of the European Parliament and important business actors. Business was too fragmented internally to succeed in establishing a full-blown liberal Europe in regard to occupational pensions, although their pressure was sufficient to secure liberal investment principles.

Pension Reforms in Europe and Life‐course Politics

AbstractIn recent years, somewhat drastic pension reforms have taken place in all European countries. The pension systems developed in the last century are no longer considered to be suited to the changing demographic constellations in European countries, and the financial sustainability of these systems is under threat. Moreover, the changing political and economic set‐up in European countries is also used to justify reforming the different pension systems. Different reasons can be given to explain the various pension reform measures without, however, there being any integrated coherence. We suggest that a politics of social policy, and of pension policy in particular, based on a life‐course perspective, facilitates the understanding of the whole range of pension reform measures. In the past, the elaborated pension systems were attuned to a normative standard biography. A new standard biography, with different phases and more transitions and combinations, enables one to understand the variety of the ongoing pension reform measures. Such a life‐course perspective integrates sequences of learning, working and caring considered necessary for the polity. In other words, it is based on a conception of human potential, and it integrates, to some extent, the previously separate domains of labour market policy, education policy, care policy and pension policy. However, recent theoretical and empirical studies of the life course lead to a critical evaluation of the new standard biography, with the conclusion that the new standard is one‐sided and scientifically unsound, entailing challenges for social policy.

Identifying differences in the performance persistence of pension plans

This paper examines performance persistence over the period 2001–2005 in the two most important investment categories of the Spanish pension market: fixed-income and equity pension funds. There is a rising trend for research into performance persistence to focus on mutual funds; however, a small number of studies are looking at this issue in relation to pension plans, especially in the Spanish market, one of the most emerging pension fund industries in the European Union. By using a nonparametric approach, clear evidence of persistence phenomenon is found in fixed-income plans, with results indicating that their returns are dependent and thus past returns are a good indicator of future investment decisions. The conclusions regarding equity plans are, however, not so clear.

Stock Market Participation and Pension Reform

We study how the introduction of a defined contribution market based retirement system affects the propensity of the investor to participate in the stock market. By using data on the "Swedish experiment", we focus on the decision to invest directly in stocks and we see how it changes once the households are allowed to participate to the new pension system. We show that, the introduction of the possibility to invest in retirement funds increases the probability of stock market participation. That is, an individual that did not participate in the stock market has a higher probability of entering it once he has been presented with the new pension scheme. Moreover, the individuals who are more likely to enter the stock market are the ones who make a deliberate portfolio choice for the retirement money. This finding is not consistent with investors perceiving the investment in retirement accounts as a close substitute to investment in equity. Quite the contrary, it suggests that being induced to choose among different pension funds does "educate" the individual, inducing him to participate in the stock market.

Actuarial Forecasts for The New National Pension Scheme in The Dominican Republic

The Dominican Republic introduced a systemic reform of the national pension scheme as from 1 June 2003, replacing the imperfect state-run defined benefit scheme with a substitutive scheme that is privately run. The new scheme came into being on the eve of a severe economic crisis and investment restrictions on Central Bank issues led to a negative real yield of 22 per cent in its first year of operation, although a return to a positive cumulative yield was forecast for the second half of 2005. The new scheme has been unable to increase overall coverage, requires structural and operational adjustments and has not yet credited the value of capitalized recognition bonds to individual accounts. It is thus essential to allow the thousands of older members who were transferred to the funded scheme and whose pensions will be far below what they would have been under the pay-as-you-go scheme to rejoin the latter if they wish to do so, as well as to take steps to improve the transparency of the annuities market and eligibility for disability and survivors' pensions.