Notional Defined Contribution Pension Systems Research Articles

Financial sustainability and automatic balance mechanisms for NDC pension systems with disability benefits

AbstractThe need for Long term care (LTC) service continues to rise due to the increasing number of elderly in the world, which stresses the healthcare systems. As most of the LTC recipients are over age 65, several authors studied retirement products combining a lifetime annuity with a long-term care benefit (typical examples are Enhanced Pension and Life Care Annuity). The development of an integrated strategy may help to address the issue of the cost of care for pensioners affected by disability. In this paper, we contribute to the debate on the introduction of LTC benefits into a notional defined contribution (NDC) pension system by using a multivariate stochastic model to represent the future evolution of transition probabilities and economic variables, which allows investigation of the financial sustainability of the system in a stochastic environment. The presence of LTC adds new risk elements, such as the uncertainty related to disability rates and mortality rates of the disabled, which may jeopardize the financial equilibrium of the integrated system. To restore the system’s equilibrium, we apply two types of automatic balance mechanisms (ABM), one based on the solvency ratio, and the other on the liquidity ratio. Both act on the indexation of pensions and the notional rate.

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.

Automatic balance mechanisms for notional defined contribution pension systems guaranteeing social adequacy and financial sustainability: an application to the Italian pension system

Since the mid 1990s some European countries (including Italy) implemented a Notional Defined Contribution (NDC) pension system. Such a system is based on pay-as-you-go funding, while the pension amount is a function of the individual lifelong contribution. Despite many appealing features, the NDC system presents some drawbacks: first, it is vulnerable to demographic and economic shocks compromising the financial sustainability; second, it could fail to guarantee adequate pension benefits to pensioners. In order to reduce the first limit, automatic balance mechanisms (ABMs) have been proposed in literature and also implemented in Sweden, while solutions that combine financial sustainability and social adequacy have been applied only in a pay-as-you-go point system. The aim of this paper is to insert into the Italian NDC architecture ABMs that preserve social adequacy under financial sustainability constraints. Godinez-Olivares et al. (Insur Math Econ 69:117–126, 2016) built ABMs for a Defined Benefit pension system using nonlinear optimization techniques to calculate the optimal paths of the control variables representing the main drivers of the system: contribution rate, retirement age and indexation of pensions. Following this line of research, we have developed a nonlinear optimization model for the Italian NDC system based on three control variables: pensions indexation, notional rate and contribution rate. The objective function considers both social adequacy and contribution rate sustainability, under liquidity and sustainability constraints. In the numerical application we apply the model to the Italian pension system and test the sensitivity of the results to different economic scenarios and objective function parameters.

Problematic aspects of the regulatory and legislative framework for calculating pensions in Ukraine

Introduction. In order to further move towards the European Economic Area, Ukraine needs to take pension reform measures. Pension provision in Ukraine has to be profoundly reformed in terms of regulatory and legislative framework for calculating pensions in Ukraine. What is of particular importance is improving Ukraine’s laws and methods for calculation and pension payments to citizens. Another important focus of the reform agenda is to define categories of people eligible for old-age pensions, disability pensions, and long- service pensions.Purpose. The purpose of the article is to interpret the regulatory and legislative framework for calculating pensions in Ukraine; to describe changes in pension payments before and after the reform was implemented; to highlight ways of improving pension payments in terms of regulations and legislation.Methods. The research methods used in the article include: analysis; comparison; historical method to consider the legislative framework for calculating pensions at different periods of time.Results. The regulatory and legal framework for calculating pensions in Ukraine is a complex system comprising the Constitution of Ukraine, the Laws of Ukraine, the Labour Code of Ukraine, decrees, Presidential decrees, International agreements and laws of the USSR. Some of these regulations and legislation need to be revised and amended in order to bring them in line with contemporary practices and modern standards.It is claimed that since 2017, Ukraine’s government has been implementing the pension reform aimed at relieving the pressure on the working-age population and improving living standards for retired people. In particular, the retirement age has been raised, eligibility criteria for preferential pensions have been revised, and methods for calculating pensions have been changed.The Ministry of Social Policy of Ukraine argues that the new pension reform is expected to enhance social, labour and post-retirement relations, to increase tax revenues through reporting real salaries, to develop a framework of social justice when calculating pensions. The author points out that the regulatory and legislative framework for calculating pensions is outdated at this stage and it requires changes. The considered changes are as follows: the establishment of a working group for entitlement of preferential pensions; the introduction of wage differentials by industries and occupations; the increase of pensions in line with inflation and age; the implementation of notional defined contribution pension system; the introduction of the new Labour Code and Pension Code, which are expected to regulate labour and post-retirement relations and meet modern standards.It is also indicated that continued employment should be enforced by legislation and a system of granting advantages and social security benefits to those who retire later needs to be developed.In terms of legislation, sufficient regard should be given to non-state pension schemes, defined contribution pension systems, and the principle of fairness when it comes to pension entitlements. It is also crucial to adjust pension amounts and retirement age to align with the sustainability ratio and the average life expectancy.Discussion. Further research of regulatory and legal framework for calculating pensions in Ukraine should be focused on the development of the Pension Code and improvement of the existing laws relative to pension calculation and payment. The author also suggests differentiating minimum wages by industries and regions and countering the illicit labour market and campaigning against payments ‘in envelope’, because official wages are the basis for calculating pensions.

Closing the gender gap in pensions: A microsimulation analysis of the Norwegian NDC pension system

In this article, we use an advanced microsimulation model to study the distributional effects of the reformed Norwegian pension system with a particular focus on gender equality. The reformed Norwegian system is based on the notional defined contribution (NDC)-formula with fixed contribution/accrual rates over the active life-phase and with accumulated pension wealth being transformed into an annuity upon retirement. A number of redistributive components are built into the system: a unisex annuity divisor, a ceiling on annual earnings, generous child credits, a possibility for widows/widowers to inherit pension rights from a deceased spouse, a targeted guarantee pensions with higher benefit rates to single pensioners compared to married/cohabitating pensioners, and finally a tax system that is particularly progressive in its treatment of pensioners and pension income. Taking complete actuarial fairness as the point of departure, we conduct a stepwise analysis to investigate how these different components of the National Insurance pension system impact on the gender gap in pensions and on general (Gini) inequality in the distribution of pension income within a cohort of pensioners. Our analysis concentrates on one birth cohort – individuals born in 1963 – and we study three different outcomes: the distribution of annual pensions early in retirement (at age 70), the distribution of the total sum of pension benefits received over retirement, and the distribution of the average annual pension benefits received over the retirement phase. In addition, we look at three alternative income concepts. These are personal income, equivalised household income, and finally an original income concept developed for this study: personal income adjusted for the economies of scale enjoyed by couple households.

The effects of aging on notional defined contribution pension systems: A theoretical investigation

AbstractThis paper proposes a theoretical framework for analyzing the properties of pay‐as‐you‐go notional defined contributions (NDCs) systems within the context of aging. Different from the defined‐benefit scheme, where aging harms the financial sustainability of the social security system, the NDC determines pension benefits while taking into account life expectancy and demographic trends, turning the issue of financial sustainability into one of pension adequacy. This paper explores the balance sheet effects when life expectancy, retirement thresholds and entry age in the labor market vary by cohorts. The study suggests some solutions for practical issues concerning aging in NDC systems, such as (a) the bias related to the forecasts of survival rates, (b) the indexation of pension benefits and (c) the setup of tenure and age requirements for retirement.

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.

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

The Strengths and Failures of Incentive Mechanisms in Notional Defined Contribution Pension Systems

Public pension systems based on the Notional Defined Contribution (NDC) principle were introduced during the ‘90s in Italy, Sweden and Poland, among other countries. They mimic private savings, in that individuals get back, as pensioners, what they contributed to social security during working life, plus returns. As such, NDC systems should realize actuarial equity and incentive neutrality. However, when one considers the presence of NDC pensions together with minimum and social assistance pensions, this is no longer true. Indeed, in all the three countries considered, the NDC system shows a regressive feature, which disincentives contributions, particularly from low earners, who would be better off entering, or staying in, the shadow economy. In order to reduce the extent of this phenomenon, we examine the effects of introducing, or increasing, the possibility of accumulation of social assistance and NDC pensions, which would also improve pension adequacy. A complete accumulation of the two would solve the incentive problem, but would be costly and would require a structural reform of the pension system financing mechanism, altering the current balance between social contributions and general fiscal revenues. We show the effects of a change in the accumulation rules for social assistance and NDC pensions in Italy using CAPP DYN, a population-based dynamic micro simulation model, which allows assessment of the evolution of the pension system in the coming decades and the distributional implications of such reform.