Occupational Pension Plans Research Articles

Should the Occupational Pension Plans’ Investment be Long-Term or Short-Term? Evidence from China

Should the Occupational Pension Plans’ Investment be Long-Term or Short-Term? Evidence from China

Surplus Optimization in Defined Benefit Pensions Using the Regime‐Switching Model: Occupational Pension Plans in South Korea*

AbstractWe assume a hypothetical defined benefit (DB) pension plan that reflects the characteristics of the occupational pension in South Korea and propose a surplus optimization strategy using a regime‐switching model. Using conditional surplus at risk, we construct an optimized portfolio that limits extreme tail risks. Furthermore, we identify the surplus risk and return conditional on global macroeconomic status using a hidden Markov model. The main results are that (i) the DB pension portfolio should move from principal‐protected products to diverse capital market products, and (ii) the DB pension portfolio using the regime‐switching model outperforms an unconditional static portfolio.

On the investment strategies in occupational pension plans

Demographic changes increase the necessity to base the pension system more and more on the second and the third pillars, namely the occupational and private pension plans; this paper deals with Target Date Funds (TDFs), which are a typical investment opportunity for occupational pension planners. TDFs are usually identified with a decreasing fraction of wealth invested in equity (a so-called glide path) as retirement comes closer, i.e. wealth is invested more riskily the younger the saver is. We investigate whether this is actually optimal in the presence of non-tradable income risk in a stochastic volatility environment. The retirement planning procedure is formulated as a stochastic optimization problem. We find it is the (random) contributions that induce the optimal path exhibiting a glide path structure, both in the constant and stochastic volatility environment. Moreover, the initial wealth and the initial contribution made to a retirement account strongly influence the fraction of wealth invested in risky assets. The risk aversion of an individual mainly determines the shape of the glide path, while the ratio of the wealth and income influences the steepness of the glide path.

On The Investment Strategies in Occupational Pension Plans

Demographic changes increase the necessity to base the pension system more and more on the second and the third pillar, namely the occupational and private pension plans; this paper deals with Target Date Funds (TDFs), which are a typical investment opportunity for occupational pension planners. TDFs are usually identified with a decreasing fraction of wealth invested in equity (a so-called glide path) as retirement comes closer, i.e., wealth is invested more risky the younger the saver is. We investigate whether this is actually optimal in the presence of non-tradable income risk in a stochastic volatility environment. The retirement planning procedure is formulated as a stochastic optimization problem. We find it is the (random) contributions that induce the optimal path exhibiting a glide path structure, both in the constant and stochastic volatility environment. Moreover, the initial wealth and the initial contribution made to a retirement account strongly influence the fractional amount of wealth to be invested in risky assets. The risk aversion of an individual mainly determines the steepness of the glide path.

Pension plan funding and market value of the firm: the Portuguese case

PurposeThe objective of the paper is to test the existence of a direct effect between the funding level of a firm's pension fund and its respective market price in Portugal, from 2010 to 2015, using a selected sample of Portuguese Stock Index (PSI Geral) firms. Although this relationship has been contemplated in the literature, especially in the United States and the United Kingdom, there is no finding concerning Portugal. The study of pension assets and obligations is of particular importance to investors and market makers alike.Design/methodology/approachThe paper utilizes two distinct methods – a cross-sectional model and a variable-effect event study – to assess the hypothesis that an increase in pension deficit is reflected in the market value of a firm by a decrease of equal magnitude.FindingsThis paper finds that a firm's market value is not reduced by an increase in pension deficit and that pension liabilities are already integrated in corporate debt. These results suggest that shareholders fail to take into account occupational pension plan funding status when valuing a firm in such a way that contrasts with the normal evaluation of debt.Originality/valueTo the best of the authors' knowledge, this is the first attempt to examine this relationship in Portugal.

Efikasnost investicione politike i politike povećanja doprinosa u održavanju dugoročne fundiranosti sponzorisanih penzijskih planova

Defined benefit occupational pension plans are facing long-term challenges in maintaining the funding level required by the pension system regulation. During a relatively short period of just two decades, private pension funds have seen two financial crises (the dot.com crisis at the beginning of the 21st century and the Global financial crisis in 2008), the period of low interest rates following the global financial crisis, and more recently, the negative effects of the corona virus epidemic as well. In such environment, the question is which mechanism is the most efficient one in achieving and maintaining the adequate level of funding for defined benefit occupational pension plans. The paper's aim is to examine the efficiency of investment policies and the policy of increasing contributions in maintaining the long-term funding of the pension fund, by using the VAR model and bootstrap resampling for simulating the observed variables. The empirical results show that the investment policy is the most efficient tool for achieving long-term funding, together with limitations in terms of the aggressiveness of the investment policy.

Pracownicze programy emerytalne w Polsce

Occupational Pension Schemes in PolandThe aging of society, the financial and economic crisis and low interest rates have astrong impact on mature pension systems. This leads to fiscal difficulties in pay-as-you-go public systems. As aresult, there is aconflict between income adequacy and financial stability of pension systems. In order to reconcile the adequacy with stability, many countries reform pension systems in areas such as system structure, pension contributions, eligibility criteria, funding methods, management meth­ods, pension benefits, taxation. There is also aquestion of how to obtain additional funding sources for retirement. It seems that one of the instruments to obtain additional financial resources in old age may be participation in Occupational Pension Schemes PPE, which in Poland offered their services in 1999 on the basis of the Act of 22 August 1997 on Occupational Pension Plans. Thus, the research objective of the work, which is the analysis of PPE in Poland in the years 1999–2016, is revealed.

Framing and the annuitization decision – Experimental evidence from a Dutch pension fund

AbstractWe report the effects of framing settings in annuity demand after conducting a survey-based experiment with members of a Dutch occupational pension plan. We gave participants the option to allocate up to 20% of their projected pension accrual to a lump sum. In particular, we investigated the joint effects of consumption and investment frames and gain and loss frames. We present strong evidence for framing effects in annuity demand. Framing effects remain significant when we control for individual characteristics. We also find robust evidence of individual characteristics influencing annuity demand, highlighting the importance of heterogeneity among participants, for example risk aversion, time preference and trust in the pension fund. Gender and long-term debt positions have significant impact how one responds to framing. We conclude that Dutch plan members generally welcome the partial lump sum option over mandatory full annuitization. The application of frames appears to predictively steer annuity demand. The precise effect framing may have, would probably also depend on the institutional environment, which predefines the perspective through which individuals filter annuities.

Is Governance Related to Investment Performance and Asset Allocation? Empirical Evidence from Swiss Pension Funds

SummaryThis study investigates the relationship between governance, investment performance and asset allocation of pension funds in Switzerland. Our sample includes survey data from 139 Swiss occupational pension plans for which we develop a governance metric comprising attributes of organisational design, management incentives, target setting, investment strategy, investment processes, risk management, monitoring, and transparency. We find empirical evidence that pension fund governance is positively related to excess returns, benchmark outperformance and Sharpe ratios. Pension funds in the top governance quartile outperform those in the bottom quartile by approximately 1% in terms of average excess returns and benchmark deviation. Furthermore, our study results indicate that asset allocation decisions are not related to governance, but rather to institutional factors.

Early access to occupational pension plans

Occupational pension plans help people to maintain their living standards after retirement. This article looks at differences in the design of occupational pensions in Belgium and the USA, and more specifically, at early access. The article shows that different cultural backgrounds influence occupational pension systems. Occupational pension plans are intended to provide retirement income, and assets should therefore not be used for non-retirement purposes such as holidays Credit card debts. However, both Belgium and the USA provide mechanisms for early access. In Belgium, early access to an occupational pension plan is, in principle, prohibited. The only exception is for the purchase of real estate since this fits within the Belgian pension philosophy that retirees should not have to spend any of their retirement income on rent. It is culturally established that pensions and house ownership are inter-connected. In the USA, early access is not prohibited but it is often discouraged. Leakages from occupational pension plans must be limited, but some flexibility needs to remain. Since participation in occupational pension plans ought to be encouraged, (too many) restrictions on access may discourage individuals from making contributions to those plans. This is the reason why there is greater flexibility towards early take up in the American private pension system.

The silent pension pillar implosion

This article discusses recent trends in occupational pension policy and identifies the rise of a second policy wave directed towards greater individualisation in occupational pension plans. It is clear that, at a global level, governments and regulatory offices are promoting the so-called third pillar as a valuable pension option and that freedom of choice of the individual is a key element in this process. This individualisation reflects the decreasing involvement of employers in occupational plans and the increasing attentiveness of governments towards individual retirement schemes. We ask whether the so-called first and third pillar are pushing the second pillar away and whether there is a silent pension pillar implosion.In the article, we describe and analyse recent legislative and regulatory initiatives in six European countries to locate the individualisation process. We also propose a new paradigm for pension policy makers in which the so-called pension pillars are abandoned and replaced by an integrated pension vision leading to a balanced target income in retirement. In this integrated vision, there is a legal link between all forms of pension in a given country. This link is reflected in social and fiscal law.

Occupational pension funds

This article reviews the orientation of the European regulation on pension fund governance in the international context of the OECD’s recommendations. It outlines the features judged to be essential for a sound private pension scheme’s governance. It then describes the orientation of the European regulations in this area and sets out some criticisms. The focus is on private sector ‘defined-contribution’ occupational pension plans managed by a pension fund, in light of the shared perception that the ‘governance’ issue is particularly sensitive for these types of schemes.

Individual Pension Funds and Capital Market Development in Turkey

AbstractBeginning with the 1980s, when the sustainability of the public pension systems became endangedered, many countries have developed their individual pension plans and/or occupational pension plans in order to supersede or support their public pension systems,. This study examines the impact of individual pension funds on the development of both debt securities market and stock market in Turkey during the period October 2006-May 2015, using Hatemi (2008) cointegration test and Toda and Yamamoto (1995) causality test with monthly data. We found that, in the long run, the private pension funds had positive impact on both development of debt securities market and stock market. Furthermore, causality appears to exist between the market for private pension funds, the debt securities market and the stock market.

Is Governance Related to Investment Performance and Asset Allovation? Empirical Evidence from Swiss Pension Finds

This study investigates the relationship between governance, investment performance and asset allocation of pension funds in Switzerland. Our sample includes survey data from 139 Swiss occupational pension plans for which we develop a governance metric comprising attributes of organisational design, management incentives, target setting, investment strategy, investment processes, risk management, monitoring, and transparency. We find empirical evidence that pension fund governance is positively related to excess returns, benchmark outperformance and Sharpe ratios. Pension funds in the top governance quartile outperform those in the bottom quartile by approximately 1% in terms of average excess returns and benchmark deviation. Furthermore, our study results indicate that asset allocation decisions are not related to governance, but rather to institutional factors.

수급자 보호를 위한 부채연계투자전략:확정급여형(DB) 퇴직연금을 중심으로

수급자 보호를 위한 부채연계투자전략:확정급여형(DB) 퇴직연금을 중심으로

Framing and the Annuitization Decision: Experimental Evidence from a Dutch Pension Fund

We report the effects of framing and default settings in annuity demand after conducting a survey-based experiment with over 3,000 members of a Dutch occupational pension plan. The participants were asked to allocate their real projected pension accrual between a life annuity and a partial lump sum. In particular, we investigated the joint effects of consumption and investment frames and gain and loss frames. We present strong evidence for framing and default setting effects in annuity demand. We also find robust evidence of individual characteristics of influence annuity demand, highlighting the importance of heterogeneity among participants. Framing and default effects remain significant when we control for individual characteristics. We conclude Dutch plan members generally welcome the partial lump sum option over full annuitization. Framing and default settings are generally capable of predictively steering annuity demand. The precise effect framing may have also depends on the institutional environment, which predefines the perspective through which individuals filter annuities.

SAVINGS IN TIMES OF DEMOGRAPHIC CHANGE: LESSONS FROM THE GERMAN EXPERIENCE

AbstractPension reforms in many developed countries make individuals shoulder a bigger share of longevity and income risks. The desired response is that individuals accumulate private assets for retirement. Whether this actually takes place, is of paramount relevance for scientists and policy makers. We take Germany as an example: Twenty years of pension reform have transformed the monolithic German pension system into a multipillar system. Formerly generous public pension benefits are gradually being reduced, whereas substantial incentives are granted to occupational and private saving schemes. Has this transition worked out? We survey the reform steps and households’ reactions: How did individuals adjust their labor market behavior? How did private and occupational pension plans take off? How do behavioral adjustments vary in the population? Most Germans adapted to the new situation. Both actual and expected retirement decisions changed and the share of households without supplementary pensions decreased from 73% to 39% in little more than a decade. This is a remarkable success. Nonetheless, households with low education, low income and less financial education did neither adjust their retirement behavior nor pick up supplementary pension plans and are thus likely to face difficulties in bridging the gap arising in future pension income.

The determinants of annuitization: evidence from Sweden

Despite the fact that the increasing involvement of the private sector in pension provision has brought more flexibility to the pay-out phase of retirement, little is known about the characteristics of those who choose to annuitize their pension wealth and those who do not. I combine unique micro-data from a large Swedish occupational pension plan with rich national administrative data to study the choice between life annuities and fixed-term payouts with a minimum payout length of 5 years for 183,000 retiring white-collar workers. I find that low accumulation of assets is strongly associated with the choice of the 5-year payout. Consistent with individuals selecting payout length based on private information about their mortality prospects, individuals who choose the 5-year payout are in worse health, exhibit higher ex-post mortality rates and have shorter-lived parents than annuitants. Individuals also seem to respond to large, tax-induced changes in annuity prices.

리스크패러티(Risk Parity)를 활용한 확정급여형(DB) 퇴직연금제도의 부채연계투자(LDI)전략

리스크패러티(Risk Parity)를 활용한 확정급여형(DB) 퇴직연금제도의 부채연계투자(LDI)전략

The Retirement-Consumption Puzzle and Unretirement

Using a panel sample of older Americans I investigate the drop in consumption at retirement, i.e. the so-called retirement-consumption puzzle, by taking into account that individuals may re-enter the labor force after being retired. In contrast with previous studies I look at how household consumption responds to the changes in both males’ and females’ labor market status. This paper has two important findings. Firstly, the unretirement decision is mainly determined by pre-retirement expectations of work and financial factors such as the amount of individuals’ accumulated savings at the time of retirement and having an occupational pension plan. Secondly, in a model where retirement and unretirement are instrumented with individuals’ retirement expectations, consumption does not respond to retirement or unretirement in line with the predictions of the life-cycle model. Overall, the findings of this paper suggest that individuals are able to smooth their consumption around retirement.