Multi-pillar Pension System Research Articles

Pension system design: roles and interdependencies of tax-financed and funded pensions

The purpose of this paper is to give an overview of the roles, objectives, and trade-offs in a two-pillar pension system consisting of tax-financed, public pensions and defined contribution, individual pensions. A pension system has many moving parts and our aim is to provide the reader with an understanding of how the parts interact and work together, a theme rarely addressed in the literature. In the first part of this paper, we give a qualitative overview of market failures, behavioural aspects, and distributional issues that form the background for a multi-pillar pension system design with mandatory components. In the second part of this paper, we present three thematic, quantitative analyses that illustrate fundamental relationship concerning wealth, inequality, insurance, and demographic changes. This paper also contains a detailed description of the agent-based model used for the analyses. The model is calibrated to Danish data, but the insights drawn from the model are of general validity.

Developing Voluntary Pension Life Insurance, Aiming to Build a Multi-Pillar Pension System in Vietnam

Vietnam currently does not have a social welfare regime for all workers. The current pension system has different pension regimes (monthly social allowance for the elderly in the social protection policy, pension regime in the form of social insurance and voluntary pension insurance products in the form of commercial insurance). However, the protection scope of the pension tiers is not enough to ensure that all workers have a pension when they reach the end of their working age. To build a multi-pillar pension insurance system, pension insurance products provided by insurance businesses are considered a strategic solution, contributing to reducing the risk of unsustainability of the system, reducing the burden of the social insurance fund, and increasing social security for people. Secondary data collection methods and data analysis methods including descriptive statistical methods, synthesis methods, analysis, comparison, and systematic approaches are used in this study to Analyze and evaluate the current situation of exploiting pension insurance products in the Vietnamese life insurance market. Based on the research results, the authors have proposed several recommendations (for the State, insurance management agencies and insurance businesses) to develop voluntary pension insurance in Vietnam, aiming to build a multi-pillar pension insurance system, ensuring sustainable social security.

Pension tracking system application: A new supervision challenge in the EU

Different areas serve as sources of pension protection for the citizens of the European Union. Along with pensions from public systems, capital pensions are playing an increasing role. Financial institutions-providers of pension savings products operate on a different business model; the diversity cause difficulties in tracking individual’s pension savings, and in promoting pension protection. The pension tracking system is seen as a mechanism for achieving a more efficient market for pension products. This paper examines the development of the pension tracking system (PTS) for European Union member states with multi-pillar pension system. We study the application of the PTS in Bulgaria, to exemplify the structure of the PTS for other EU member states. We conclude that the development of PTS is a necessary set of measures that would be a prerequisite for improving the well-being of the savers.

Pension Security Level of Urban Employees in China Based on CHIPs

In 2019, the Chinese government has put forward comprehensive plan for reducing social insurance premium rate, which will affect the measurement of the pension security level. In order to evaluate the pension level, this paper uses CHIPs data from 1988 to 2018 to calculate “empirical” pension replacement rate by “empirical” method based on different wage calibers. The result shows that the pension replacement rate and income replacement rate of urban employees have gradually declined in the past 30 years. The pension level of nonprivate employees is lower than that of insured employees, and that of insured employees is lower than that of full‐scale employees. The pension level of male, high‐income groups, the older generation, organs, and institutions is much higher than that of female, low‐income groups, the younger generation, and enterprises relatively. Compared with other countries, the pension replacement rate of urban employees in China is not low, but the income replacement rate is relatively low. This paper makes an in‐depth analysis of the actual pension level under the new policy. As a result, it is necessary to vigorously develop multilevel and multipillar pension system such as enterprise annuity, occupational annuity, and commercial pension insurance, so as to improve the pension level of urban employees.

Private pensions funds in North Macedonia and Russia

The article focuses on the reform of the pension systems in North Macedonia and Russia, which resulted in switch from one-pillar to multi-pillar pension systems, and current legal and institutional architecture in both legal systems with emphasis on private pension funds which are widely recognized as the core drivers for the improvement of the living standards of retirees. The article starts with the general overview of Macedonian and Russian pension systems which provides the necessary background for understanding of the legal regime of private pension funds. The general overview of the pension systems is followed by the detailed analysis of the legal status of private pension funds in both countries, with more attention being paid to the experience of North Macedonia where private pension funds play a more important role in the pension system. In Russia private pension funds have shown their positive effect, but their coverage in general is still moderate. The overview of general rules of taxation of contributions to private pension funds and pensions concludes the article. The comparative research allowed to make the conclusion that both countries have made different progress in moving to a three-pillar pension system especially from the viewpoint of the established legal and institutional framework, and the establishment and operation of the private funds, both mandatory and voluntary.

A stochastic dominance approach to pension-fund selection

Abstract This paper contributes to the research on multi-pillar pension systems with main focus on private pension funds (PFs). In this context, the specific objective of this study is to determine which second-pillar private fund is the best for participants in such systems on the basis of their risk profile. Based on the assumptions on utility functions of the participants in a pension scheme, four types of stochastic dominance (SD) relations are considered, specifically first order, second order, third order and SD generated by utility functions with decreasing absolute risk aversion. We conduct an analysis under two distributional assumptions: empirical and stable distribution of returns. Moreover, the investors for which non-dominated funds are the optimal choices are identified. Allowing for diversification, the efficiency of the PFs with respect to several types of SD is tested. Then, the observed behaviour of participants in the last quarter/year is compared to the results of SD analysis. Finally, the identified SD relations are stress-tested using data originating from a period of turmoil. Despite the focus on Lithuanian PFs, the methodology developed in this work can be employed by participants or PF managers in similar markets of other countries.

The transition to a multi-pillar pension system: the inherent socio-economic anomaly

PurposeThis paper aims to analytically show that in an over-lapping-generation (OLG) model, low earning cohorts bear unwanted risk and absorb higher economic cost than high earning cohorts do.Design/methodology/approachThis paper aims to consider the individual's risk appetite, using a simple utility function, based on consumptions and discount rates in each period. This paper calibrates the model according to teh Israeli pension system as a representative of a small open developed organization for economic cooperation and development country. Israel is considered as unique case study in the pension landscape, as it implements almost pure defined contribution pension scheme with continuous trend of pension market capitalization (Giorno and Jacques, 2016). Hence, this study finds Israel suitable for examining the theoretical mix of pension scheme. That model enables exploring combined solutions for adequate old age benefits, involving the first and the second pension pillars, under fiscal constraints.FindingsIt comes out that for risk-averse individuals, the optimal degree of funding is negatively correlated to asset returns' volatility and positively correlated to earning decile level. The neglect of risk and individual's current earning level will thus overstate the contribution level and funded percentage from total contributions. Moreover, even in an economy with minimum government intervention, and highly developed private pension fund with high average of rate of return, the authors find it is optimal that the pension system contains a sizeable unfunded pillar. This paper innovates by revealing a socio-economic anomaly in design of mix pension systems in favor of high earning cohorts on the expense of economic loss of low earning cohorts.Practical implicationsThe model presented in this paper could be implemented in countries with mix pension systems, as an alternative to public social transfers or means tested, alleviating poverty and inequality in old age. Additionally, this model could raise the public awareness of the financial sustainability of the unfunded pay-as-you-go pillar to diversify financial risk in pension systems, especially for low earning cohort in society.Social implicationsOne area of research that is particularly relevant in this context concerns the issue of alleviating poverty and income inequality. It is often stressed that the prevention of old age poverty is among the central targets of well-designed pension system (Holzmann and Hinz, 2005). The conceptualization of minimum pension guarantee used in this composition allows to clearly capturing the notion of such a poverty and social targets as an integral part of the pension system rolls.Originality/valueThis paper innovates by revealing a socio-economic anomaly in design of mix pension systems in favor of high earning cohorts on the expense of economic loss of low earning cohorts. That comes to realize through the level of total contribution rates and funded share that are generally optimal for high earning cohorts but not for low earning cohorts. This paper identifies that the effect of anomaly is most significant in a market characterized with high income-inequality level. This paper finds that imposing intra-generational risk sharing instrument in the form of minimum pension guarantee can re-balance pension design among different earning cohorts. This solution demonstrates balancing effect on the entire economy.

Enhancing Pension Adequacy While Reducing the Fiscal Budget and Creating Essential Capital for Domestic Investments and Growth: Analysing the Risks and Outcomes in the Case of Greece

Many countries around the world are resorting to mandatory funded components in their multi-pillar pension systems with the purpose of catering for the financial pressure from ageing. This paper aims at analysing the possible replacement rates for such a scheme, by choosing different assumptions and setting the best combined area for the expected result. Then, an approach for analysing the potential for the implementation of such a scheme in Greece is presented along with the actuarially projected expected benefit expenditure and respective accrued capital. A result of the introduction of such a component is expected to be the elevated replacement rate at retirement with a concurrent alleviation of the fiscal burden for the state. The projected scale of savings will also provide domestic financing for investments generating growth.

Eligibility for retirement and replacement rates in the Uruguayan multi-pillar pension system

We project the levels of eligibility and gross replacement rates of the pay-as-you-go and individual capitalization pillars in Uruguay. Based on a random sample of worker administrative records, we...

The shape of the pension scheme in Poland in the light of the conventional multi-pillar typologies

In recent years, a number of modifications that have a significant impact on the shape of the pension system in Poland are introduced and discussed (e.g. OFE [Open Pension Funds] reform, implementation of the PPK [Employee Capital Plans], introduction of civil pensions, etc.). The result of these changes is that the traditional, three-pillar way of presenting the shape of this system does not reflect its essence any more. On the basis of the typologies of multi-pillar pension systems proposed in the literature, the study propose a new concept for presenting the shape of the general pension system in Poland. It consists of four levels of pension security, distinguished by the criterion of the initiating subject. These levels together form the base and the supplementary part of the pension system.

Individualisation reversed: the cross-class politics of social regulation in the UK’s public/private pension mix

Since the turn of the century UK pension politics has been dominated by legislative and regulatory efforts to increase the state’s redistributive role in the pension system. Such developments are unexpected by the theoretical literature on welfare states. This predicts regulatory disputes in multi-pillar pension systems, but does not expect egalitarian reforms in liberal systems like the UK where organised labour is weak. We explain these reforms as a product of a temporary cross-class alliance, facilitated by a cohesive pension policy network, and formalised by an independent Pensions Commission. The consensus was possible because the public/private nature of the UK pension system politicised the non-state sphere, shaping the preferences of pension policy actors, and leading business to reach a compromise agreement with unions.

Proaktívny prístup k tvorbe súkromných dôchodkových úspor: kľúčové determinanty

Component encouraging private savings was introduced or is under consideration in pension schemes of many countries. This diversification of old-age income sources shifts the responsibility for the level of retirement income to the individuals themselves and, at the same time, opens the question about their preparedness for such financial decisions. Inadequate savings could have enormous impact on their future life and determine their standard of living in the period of retirement. The aim of the paper is to identify key demographic and socio-economic factors determining individuals' proactive approach to the private pension savings. We also would like to point out group of individuals with a low level of the private savings involvement. These individuals are potentially poverty vulnerable in their old-age. Using representative sample of 2 826 citizens of the Slovak Republic from the Household Finance and Consumption Survey carried out by the National Bank of Slovakia, we have identified as key factors age, education, income, ownership of second real estate and other financial assets and sharing household with pensioners. Our research contributes to the extension of existing knowledge that can be used by countries with multi-pillar pension systems, absence of occupational employment funds and low availability of products for voluntary pension savings.

Impact of changes in multi-pillar pension systems in CEE countries on individual pension wealth

AbstractThe paper shows the impact of changes in multi-pillar pension systems in six Central and Eastern European countries for individual pension wealth. It demonstrates that the post-crisis changes in pension system reduced pension wealth of workers in Poland and increased in Lithuania and Slovakia. The change did not have significant impact on pension wealth in Estonia and Romania. The magnitude of this effect is highest in those countries where the reduction of the fully-funded pension contribution was permanent. Loss or gain in pension wealth varies with age of participants – it is higher for younger people, who will accumulate their pension wealth to a larger extent after the change. The level of the change in pension wealth depends also on the wage level – higher earners lose more relative to the average wage level. The difference in pension wealth depends also on the difference between rates of return in fully funded and pay-as-you-go (PAYG) components of the pension system. The net outcome of post-crisis pension system modifications depends both on the magnitude of fully-funded contribution reduction, but also on the design of PAYG component and the way individual pension rights are accrued. These results indicate the rise in implicit liability of pension system in Slovakia to be higher than the reduction of the explicit liability caused by the pension system change and the lower rise of implicit liability in Poland and Latvia.

Evaluación de una propuesta de sistema de pensiones multipilar para Perú

This article estimates and analyses the potential fiscal and distributiveeffects of a proposal to transform the current Peruvian pension system intoa multi-pillar pension system. In this new system, part of the contributionswould go to a solidarity fund to finance minimum pensions, and the rest toindividual retirement accounts. The simulation of actuarial liabilities andfuture distributions of pensions are performed using random samples fromthe database of administrative records of individuals insured by the Peruvianpublic and private pension systems as at December 2013. This study analysesthe effects of the reform on actuarial liabilities, inequality of pensions, andoverall wellbeing of pensioners, in order to illustrate the different trade-offsinvolved in pension reform. At the same time, the explicit inclusion of normativejudgments in the evaluation of welfare functions makes it possible to determinethat a multi-pillar pension system is better than the current one, even underthe stringent condition of no aversion to inequality.

Welfare, Inequality and Financial Effects of a Multi-Pillar Pension Reform: The Case of Peru

This paper studies the potential effects of a multi-pillar pension system on pension inequality, actuarial liability and welfare in Peru, by means of simulations of future distributions of pensions with social security administrative records. The results show that actual pension inequality and actuarial liability can be substantially reduced with welfare preserving policies. The simulations illustrate that when welfare is considered, it is important to define the implied value judgments, which are not universally agreed upon. Therefore, this paper highlights the trade-offs of a pension policy reform and contributes to assess the second generation of pension reforms in Latin America.

The Enlightenment to China from UK’s Pension Entering Capital Market

As the aging problem is increasingly serious in China, the pension operation and management attract more and more attentions. However, China’s pension yields have been low, leaving a lot of problems. There are growing calls to make China’s pension enter capital market. While, there exists many risks, such as the unavoidable stock market risk and the potential risk in the “principal-agent”. Pension management should be of caution and safety. Attentions should be paid to improve relevant laws, strengthen supervision, perfect China’s multi-pillar pension system and so on. UK has enlightened China on pension entering capital market.

The Determinants of Pension Switching: Empirical Evidence for Romania

Currently, in the post-communist Central and East European Countries, an intricate debate regarding the survival of their multi-pillar pension systems is needed.The authorities in the field search for solutions to protect individuals after retirement. Using a self-designed questionnaire and a related national survey conducted in 2010 for the Romanian major urban population, assigned to mandatory private pension funds, we analyse the socio-economic and demographic determinants for the decision to transfer from one fund to another. We find the reputation of the pension fund and the age of the respondents as determinants for the decision to switch the private pension fund in our binary logit model. Younger persons are more susceptible to switch the private pension funds.

(Purchase Decision, Amount, and Purchase Intention of Individual Annuity)

Korean Abstarct: 본 연구에서는 개인연금 가입현황과 보유특성을 살펴보고, 개인연금 가입결정과 납입액 규모에 영향을 미치는 요인을 2단계 선택모형으로 분석하였다. 개인연금 가입유형을 연금저축과 연금보험으로 구분하여 분석하였고, 개인연금 미가입자를 대상으로 가입의향에 영향을 미치는 요인을 파악하였다. 전국의 만 20세-59세 성인남녀를 대상으로 온라인 설문조사를 시행하였으며, 총 460부의 자료를 최종 분석에 사용하였다. 본 연구의 주요 결과는 다음과 같다. 첫째, 공적연금 가입가계가 90%인데 반해, 퇴직연금 가입가계는 37%, 개인연금 가입가계는 55%로 나타났으며, 1,2,3층의 공적, 퇴직, 개인연금에 모두 가입한 가계는 24%에 불과했다. 개인연금 가입가계 중에서는 연금저축(세제적격)에 가입한 가계가 연금보험(세제비적격)에 가입한 가계의 2배 이상이었다. 연금저축과 연금보험에 둘 다 가입한 가계는 각 연금상품에 평균 이상의 금액을 납입하는 것으로 나타났고, 가입기간 역시 각각의 연금상픔 보다 긴 것으로 나타났다. 둘째, 개인연금 가입결정과 연간납입액 규모에 영향을 미치는 요인을 분석한 결과, 배우자가 있고, 자영업자, 사무직이고, 자가를 보유하고, 월평균가계소득이 높을수록, 공적연금, 퇴직연금에 가입하고, 은퇴 후 희망하는 경제수준이 높을수록 개인연금 가입 가능성이 높아졌고, 노후준비수단으로 금융자산과 부동산을 보유한 가계는 개인연금 가입 가능성이 낮았다. 또한 개인연금 가입가계 중에서는 여성, 배우자 있는 가계, 대졸이상, 중소도시, 읍면부 거주가계, 공적연금 미가입 가계가 개인연금 연간납입액이 많은 것으로 나타났다. 셋째, 개인연금 미가입자의 53%는 향후 개인연금에 가입할 의향이 있는 것으로 나타났다. 개인연금에 가입하지 않은 이유가 연금납입액의 경제적 부담 때문일 경우에는 향후 개인연금에 가입할 의향이 낮았지만, 미가입 이유가 개인연금상품 정보 부족 때문일 경우에는 개인연금 가입의향이 높은 것으로 나타났다. English Abstract: The purpose of this study was to analyze the factors affecting the purchase decision and amount of individual annuities by using Heckman's two-step estimation models. A special attention was paid to the type of annuities, such as annuity saving with tax credit and annuity insurance without tax credit. This study also analyzed purchase intention of individual annuities for those who do not have any annuity. The online survey results from the 460 respondents, aged between 20 and 59, are as follows. About 90% of households had public pension, 37% of them had retirement pension, and 55% of households had individual annuities. Those who had multi-pillar pension system were about 24%. Those who owned annuity savings were more than those who owned annuity insurances. The households which had both annuity savings and annuity insurances had higher level of annual amount of payment and longer periods of annuity holdings. Those who were married, self-employed, office workers, high income earners, and home owners were more likely to have public pension and individual annuities. In addition, those who possessed financial assets and real estates for the retirement planning were less likely to have individual annuities. Household's income, asset holdings, education level, public pension had generally positive impacts on the amount of annual payment of annuities, while ownership of real estates for retirement planning appeared to decrease the probability of annuity holdings. About 53% of respondents who did not have individual annuity had intention of annuity purchase. Those who did not have annuity because of economic burden were not likely to purchase individual annuity. However, those whose reason was due to lack of information were likely to purchase individual annuity.

The Effectiveness of the Multi-Pillar Pension System in Providing Adequate Old-Age Income Security

The Effectiveness of the Multi-Pillar Pension System in Providing Adequate Old-Age Income Security

Monopoly and competition on Bulgarian pension market

Challenges facing social security system in Bulgaria occurred as a result of radical political and economic changes after 1989 call for a reform and a new philosophy in the social security system. Multi-pillar pension system was introduced and the operation of private pension insurance companies was launched. Amid deepening demographic crisis and worsening economic climate the future role of supplementary pension insurance is essential for the achievement of expected results of the pension reform. The article’s main goal is to study how pension insurance companies in Bulgaria operate in the free market environment. To achieve this goal the following tasks are completed: ● Analyzed are the market concentration and market shares of the pension insurance companies and the net assets managed by them from mandatory and voluntary funds; ● Analyzed are some of the existing problems and measures are proposed to overcome them. The methods utilized during the study are the system approach, statistical evaluations, analysis and synthesis, comparison methods and others.