Notional Defined Contribution Pension Schemes Research Articles

Fertility, Imperfect Labor Market, and Notional Defined Contribution Pension

What is the relationship between notional defined contribution (NDC) pension scheme and fertility? What are the differences and similarities between NDC pensions and PAYG pensions? How is the return rate of NDC account determined? Do pensions affect the labor market equilibrium and work engagement behavior? This study answers such questions and elucidates the relationship between NDC pension scheme and fertility by considering endogenous labor supply in an imperfect labor market with efficiency wage in a two-period overlapping generations (OLG) model. The analysis reveals that fertility and NDC pension account return rate are positively correlated; hence, increasing the return rate of the NDC account may improve people’s fertility incentives. Second, NDC pension system and PAYG pension is different in children’s externality on the society. Third, the account return rate depends on the wage growth rate, the fertility level and the employment status. Fourth, higher pension benefits could lower the unemployment rate and disincentivize shirking behaviors.

Fairness and annuity divisors for notional defined contribution pension schemes

AbstractThe use of a gender-neutral annuity divisor introduces an intra-generational redistribution from short-lived towards long-lived individuals; this entails a transfer of wealth from males to females and from low socioeconomic groups to high socioeconomic groups. With some subpopulations consisting of females from low socioeconomic groups (or males from high groups), the net effect of the redistribution is unclear. The study aims to quantify the lifetime income redistribution of a generic NDC system using two types of divisor – the demographic and the economic – to compute the amount of an initial pension. With this in mind, the redistribution (actuarial fairness) among subpopulations is assessed through the ratio between the present value of expected pensions received and contributions paid. We find that all subgroups of women and men with high educational attainment benefit from the use of the unisex demographic divisor. This paper also shows that the value of the economic divisor depends markedly on population composition. When mortality differentials by gender and level of education are considered, economic divisors are mostly driven by the longevity effect corresponding to gender.

Continuous time model for notional defined contribution pension schemes: Liquidity and solvency

Notional Defined Contribution (NDC) pension schemes are defined contribution plans which are pay-as-you-go financed. From a design viewpoint, the countries where NDCs have been implemented cannot guarantee sustainability due to the choice of notional return paid to the contributions and the indexation rate paid to pensions. We study how the scheme should be designed to achieve liquidity and solvency with a limited set of assumptions in a continuous overlapping generations model that increases traceability of the results. The adequacy and actuarial fairness are also jointly studied in the numerical example for the population of Belgium. We find that the proposed indexation and notional rate act as automatic balancing mechanisms that ensure sustainability and actuarial fairness. However, the effect on pension adequacy depends on the generosity of the annuity scheme at retirement.

The Notional Defined Contribution Pension Scheme and the German ‘Point System’: A Comparison

AbstractThis paper examines the analytical properties of the German ‘points-based’ pension system. These properties are compared with those of a canonical Notional Defined Contribution (NDC) pension scheme. The paper identifies the circumstances under which the German ‘points-based’ system would mimic a Swedish-type NDC scheme and verifies to what extent the German ‘points-based’ scheme ensures uniformity of individual rates of return for some hypothetical careers. Finally, the paper proposes a set of new possible adjustment rules able to increase similarity between the German point system and the NDC scheme.

Just Round the Corner? Pros, Cons, and Implementation Issues of a Fiscal Union for the Euro Area

The experience of a number of successful monetary unions and economic theory suggest that the euro area would benefit from the establishment of a supranational fiscal capacity, provided its design keeps the risk of moral hazard at bay. Institutional reforms prompted by the crisis (e.g., the European Stability Mechanism and the banking union) are introducing - though to a limited extent - elements of crosscountry risk sharing. Nevertheless, among European institutions there is a broad consensus that further steps are needed. Proposals to create a sort of rainy-day fund present major practical difficulties - associated, inter alia, with the uncertainty characterising the identification of shocks in real time. A more appropriate solution, consistent with how risk sharing operates in existing federations, may be to centralize specific public functions. One often-discussed possibility is the introduction of a common unemployment benefit scheme. We argue that consideration could also be given to the creation of a euro-wide, notional defined-contribution pension scheme.

Liquidity and Solvency in Pay-as-You-Go Defined Contribution Pension Schemes: A Continuous OLG Sustainability Framework

Notional Defined Contribution pension schemes are defined contribution plans which are pay-as-you-go financed. From a design viewpoint, the countries where NDCs have been implemented cannot guarantee sustainability due to the choice of notional return paid to the contributions and the indexation rate paid to pensions. We study how the scheme should be designed to achieve liquidity and solvency with a limited set of assumptions in a continuous overlapping generations model that increases traceability of the results. The adequacy and actuarial fairness are also jointly studied in the numerical example for the population of Belgium. We find that the proposed indexation and notional rate ensure sustainability and actuarial fairness. However, the effect on pension adequacy depends on the generosity of the scheme at retirement.

A “Swedish” actuarial balance for a notional defined contribution pension scheme with disability and minimum pension benefits

AbstractThis article proposes a “Swedish” type actuarial balance sheet (ABS) for a notional defined contribution (NDC) scheme with disability and minimum pension benefits. The proposed ABS splits the pension system in two parts: the pure NDC part and the redistributive part, which includes the assets and liabilities originating from non‐contributory rights. The article contains a numerical example that sheds light on the real applicability of our proposal. The model has practical implications that could be of interest to policy‐makers, given that it integrates actuarial and social aspects of public pensions and discloses the real cost of redistribution through minimum pensions.

GUARANTEE VALUATION IN NOTIONAL DEFINED CONTRIBUTION PENSION SYSTEMS

AbstractThe notional defined contribution pension scheme combines pay-as-you-go financing and a defined contribution pension formula. The return on contributions is based on an index set by law, such as the growth rate of GDP, average wages or contribution payments. The volatility of this return compromises the system's pension adequacy and therefore guarantees may be needed. Here, we provide a minimum return guarantee to the pension contributions. The price is calculated in a utility indifference framework. We obtain a closed-form solution for a general dependence structure with exponential preferences and in presence of stochastic short interest rates.

Guarantee Valuation in Notional Defined Contribution Pension Systems

The notional defined contribution pension scheme combines pay-as-you-go financing and a defined contribution pension formula. The return on contributions is based on an index set by law, such as the growth rate of GDP, average wages, or contribution payments. The volatility of this return compromises the system's pension adequacy and therefore guarantees may be needed. Here we provide a minimum return guarantee to the pension contributions. The price is calculated in a utility indifference framework. We obtain a closed-form solution for a general dependence structure with exponential preferences and in presence of stochastic short interest rates.

A 'Swedish' Actuarial Balance Sheet for a Notional Defined Contribution Pension Scheme with Disability and Retirement Benefits

This paper proposes a “Swedish” type actuarial balance sheet for a notional defined contribution scheme embedding disability insurance within the retirement pension system. The underlying framework supporting the actuarial balance relies on a multistate overlapping generations model that includes the so-called survivor dividend and a minimum pension benefit for both contingencies. The proposed ABS splits the system into two parts: the actuarial part (pure NDC) and the redistributive part, which includes the assets and liabilities originating from non-contributory rights. The paper also contains a numerical example that sheds light on the real applicability of our proposal and confirms that the model works reasonably well. The results obtained make sense and provide us with some useful values regarding the impact of introducing a minimum pension on the system's financial equilibrium. The model has practical implications that could be of interest to policy makers, given that it integrates actuarial and social aspects of public pensions and discloses the real cost of redistribution through minimum pensions.

CRITERIA FOR SUSTAINABILITY OF OLD-AGE PENSION SYSTEM BASED ON THE NDC PRINCIPLES

The topicality of the research subject. The foundations of the old-age pension scheme based on notional accounts, also referred to as the “notional defined contribution” or “non-financial defined contribution” (NDC) old-age pension scheme, were laid in Sweden in 1994, when the prevailing view was that a sustainable defined-contribution PAYG old-age pension scheme is impossible. Since then, the NDC system modifications have been implemented in several countries; since 2000, this scheme is also part of the Latvian pension system and works significantly better than the other part of the pension system - the funded pension scheme. However, the sustainability of NDC scheme is still being questioned. To prevent the NDC pension system sustainability problems, the authors (Pukis, M., & Dundure, I., 2012) in their publication “The Sustainability of the Pension System in Latvia” and (Dundure, I., 2015), the article “Sustainable Old-age Pension System by Developing Notional Defined Contribution Pension Scheme” have proposed a modified NDC model that provides sustainability of the pension system considering the known risks inherent in the pension system. The aim of the paper is to research and analyse the conditions for building a sustainable pension system by developing a Notional Defined Contribution pension scheme and working out an adjusted (modified) old-age pension calculation formula. In order to achieve the above mentioned aim, the authors set the following tasks: __Define the old-age pension system based on NDC principles; __Define the primary objectives of pension systems and perform analysis of pension adequacy; __Define the conditions for achieving a sustainable old-age pension system based on NDC principles; __Develop an adjusted (modified) old-age pension calculation formula based on NDC principles. In order to achieve the established aim and tasks, the following scientific research methods have been used in the work: analytical method, comparative method, logically and abstractedly constructive method. The analytical method and the comparative method are employed for conducting pension adequacy analysis and examination of pension capital indexation and indexation of pensions after retirement, as well as for the purpose of studying the Notional Defined Contribution pension system. The logically and abstractedly constructive method is employed for making forecasts and defining the main research results – the conditions for ensuring pension system sustainability that have been determined by the authors in the course of the research. The authors proved that by basing on the principle of generation solidarity and equity and through improvement of NDC pension calculation formula, it is possible to create the old-age pension system, which would be capable of excluding the old-age pension instability causes. DOI: http://dx.doi.org/10.5755/j01.eis.0.9.12798

Longevity Risk in Notional Defined Contribution Pension Schemes: A Solution

Notional defined contribution pension schemes (NDCs) aim at reproducing the logic of a financial defined contribution plan under a pay-as-you-go framework. Of particular interest is how the accumulated capital of a deceased person is used when the death occurs prior to retirement. While in most countries this accumulated capital (called survivor dividend, SD) is kept by the scheme, in Sweden it is distributed among the same cohort survivors. This paper aims to analyse to what extent the SD kept by most NDCs can be used to cover an unexpected longevity increase. We develop formulas under different assumptions (constant or according to Lee–Carter mortality improvements) to calculate the maximum mortality decrease a scheme can cover if the SD is not distributed. We also apply the formulas using Polish, Latvian and Swedish life tables and show that the non-distribution of the SD is a potential solution to cover the longevity risk of NDCs.

Notional defined contribution pension schemes: why does only Sweden distribute the survivor dividend?

The aim of this paper is to analyse the role of the survivor dividend in notional defined contribution (NDC) pension schemes. At present, this feature can only be found in the Swedish defined contribution scheme. We develop a model that endorses the idea that the survivor dividend has a strong basis for enabling the NDC scheme to achieve financial equilibrium and that not including the dividend is a non-transparent way of compensating for increases in longevity and/or legacy costs from old pension systems. We also find that the average effect of the dividend remains unchanged for any constant annual rate of population growth, that contributors who reach retirement age always get a higher return than the scheme does, and that population growth enables cohorts with more years of contributions to benefit to a greater extent from the dividend effect.

Just Round the Corner? Pros, Cons, and Implementation Issues of a Fiscal Union for the Euro Area

The experience of other successful monetary unions and economic theory suggest that the euro area would benefit from the establishment of a supranational fiscal capacity. Institutional reforms prompted by the crisis (e.g., the European Stability Mechanism and the banking union) are introducing – though to a limited extent – elements of cross-country risk sharing. Nevertheless, further steps are probably needed. Proposals to create a sort of rainy-day fund present major practical difficulties – associated, inter alia, to the uncertainty characterizing the identification of shocks in real time. A more appropriate solution, consistent with how risk sharing operates in existing federations, may be centralizing specific public functions (for instance, by introducing a common unemployment benefit scheme). We argue that consideration could also be given to the creation of a euro-wide, notional defined-contribution pension scheme.

Notional defined contribution pension scheme experience in Latvia some lessons

Notional defined contribution pension scheme experience in Latvia some lessons

Notional Defined Contribution (NDC) Pension Schemes and Income Patterns

During the 90’s, some important European countries, among which Italy and Sweden, have radically transformed their public pension system by adopting defined-contribution rules, while retaining the pay-as-you-go financial architecture. The paper inquires into the theoretical properties of the Notional Defined Contribution pension schemes in order to identify the determinants of the replacement rates awarded to individuals with different income patterns. Three typical career patterns are taken into consideration, according to whether the individual wage growth is equal to, higher or lower than the average wage growth. The impact of, and the possible remedies to a possible discontinuity on the replacement rates is finally discussed by means of a sensitivity analysis of the replacement rates with respect to the career length (for a given retirement age), the retirement age and the conventional rate of return credited on all individual accounts.

THEORETICAL FOUNDATIONS OF PAY‐AS‐YOU‐GO DEFINED‐CONTRIBUTION PENSION SCHEMES

ABSTRACTThe paper inquires into notional defined contribution pension schemes, which retain the pay‐as‐you‐go financing method while adopting the award and indexation formulas typical of funded, defined‐contribution systems. It examines the properties of the new arrangement and compares them with those of the traditional defined‐benefit pay‐as‐you‐go schemes.