Nonfinancial Defined Contribution Research Articles

Increasing longevity, NDC implementation in Italy and Sweden, and all that

The aim of the paper is twofold. First, it addresses the delicate issue of divisor obsolescence within Non-financial Defined Contribution (NDC) pension schemes. It suggests a method to measure the impact of this obsolescence, referring to the Swedish mechanism of diversifying divisors by birth cohort. Given the serious impact of divisor obsolescence on the fairness and sustainability of NDC systems, the paper also proposes possible solutions to limit this impact. The second aim is to analyze the shortcomings of the Italian system in the light of the challenge to NDC architecture resulting from the obsolescence of divisors. The first anomaly is the current mechanism of periodical revision of the divisors, which prevents Italian workers from planning their retirement on the basis of definite and unchanging information. The second is the extremely wide retirement age range due to the existence of seniority pensions: this needs to be replaced by a small retirement age range with a sufficiently high and rigorous lower bound. Finally, the paper focuses on the need for all NDC systems to compute new divisors based on a much lower frontloading rate, as has recently been done in Norway. It finally suggests that the severe reductions in the replacement rates implied by a lower ‘frontloading’ can be avoided by either removing the survivors benefit from the old-age scheme or by giving workers the option to choose it ‘at their own expense’, as in the second pillar.

NDC Schemes and Heterogeneity in Longevity: Proposals for Redesign

A positive relationship between lifetime income and life expectancy leads to a redistribution mechanism when the average cohort life expectancy is applied for annuity calculation. Such a distortion puts into doubt the main features of the NDC (nonfinancial defined contribution) scheme and calls for alternative designs to compensate for the heterogeneity. This paper explores five key mechanisms of compensation: individualized annuities; individualized contribution rates; a two-tier contribution structure with socialized and individual rates; and two supplementary two-tier approaches to deal with the income distribution tails. Using unique American and British data, the analysis indicates that both individualized annuities and two-tier contribution schemes are feasible and effective and thus promising policy options. A de-pooling by gender will be required, however.

Conceptualizing, measuring and financing the legacy costs in an NDC reform

AbstractThe paper provides a framework for the conceptualization, definition and measurement of the legacy costs that needs to be addressed in a reform that transforms an unfunded (or non-financial) defined benefit (NDB) scheme into an equally unfunded notional (or non-financial) defined contribution (NDC) scheme. During a transition from NDB to NDC a financing gap typically arises due to accrued to date liabilities from the old system in excess of the NDC scheme's sustainable flow of benefits. This gap – or legacy cost – needs to be estimated and best explicitly financed. We illustrate different techniques to gauge the scope of the cost. The paper applies the proposed approach to a hypothetical NDC reform in China.

NDC v. FDC: Pros, Cons and Replication

This paper examines the advantages and disadvantages of non-financial defined contribution (NDC) pension plans relative to financial defined contribution (FDC) pension plans. It also shows how an NDC outcome can be replicated in a FDC framework.

NDC v FDC: Pros, Cons and Replication

This paper examines the advantages and disadvantages of non-financial defined contribution (NDC) pension plans relative to financial defined contribution (FDC) pension plans. It also shows how an NDC outcome can be replicated in a FDC framework.

Addressing the Legacy Costs in an NDC Reform: Conceptualization, Measurement, Financing

The paper provides a framework for the conceptualization, definition and estimation of legacy costs that need to be addressed in a reform that transforms an unfunded defined contribution (NDB) scheme into a notional (or non-financial) defined contribution (NDC) scheme. As the new contribution rate is fixed and, perhaps, reduced, paying for the accrued to date liabilities leaves a financing gap that needs to be estimated and financed, best outside the pension system if a less distorting financing form is available. The paper illustrates the proposed measurement approach with broad estimates under a hypothetical NDC reform in China.

Addressing the Legacy Costs in an NDC Reform: Conceptualization, Measurement, Financing

The paper provides a framework for the conceptualization, definition and estimation of legacy costs that need to be addressed in a reform that transforms an unfunded defined contribution (NDB) scheme into a notional (or non-financial) defined contribution (NDC) scheme. As the new contribution rate is fixed and, perhaps, reduced, paying for the accrued to date liabilities leaves a financing gap that needs to be estimated and financed, best outside the pension system if a less distorting financing form is available. The paper illustrates the proposed measurement approach with broad estimates under a hypothetical NDC reform in China.

Shifting Perspectives in Pensions

This paper addresses the questions of what is an economically efficient pension system, what are the externalities and what are the risks of the four alternative pension systems: financial defined contribution (FDC), notional or non-financial defined contribution (NDC), financial defined benefit (FDB) and non-financial defined benefit (NDB). A main contribution of the paper is the development of the concept of NDC, itself a new construction in pension economics. An important conclusion is that NDC is neutral in terms of externalities. It manages the risks and eliminates the negative externalities associated with traditional public NDB schemes, and in a manner similar to FDC schemes.