Pension Choice Research Articles

Investigating pension choice factors among the faculty of public sector universities in Pakistan

PurposeThis research designed, optimized and tested a context-specific scale to evaluate public sector employees' pension choices.Design/methodology/approachThe authors developed the scale using a comprehensive process of interviews and focus groups with experts across academia and finance. The authors used the refined scale to collect data from 564 faculty members in public sector universities following a multistage systematic cluster sampling technique. The findings revealed diversity in choice across different socio-economic and demographic variables.FindingsThe results revealed that items related to the defined benefit pension system explain most of the data variance and are preferred widely. This is followed by a preference for monetizing pension benefits and a defined contribution system. These findings indicated the need for flexible pension plans.Practical implicationsTherefore, the progressive movement towards monetization and the shift from defined benefit to a defined contribution pension system due to economic pressures must be accurately calculated and introduced where it is suitable.Originality/valueAlthough the theory of introducing a defined contribution pension system and monetization system is appealing, its practical implementation may not be encouraging for all employees.

Pension Portfolio Optimization and Impact of Debt Defaults

Usually, the government offers two pension methods, a lumpsum buyout or an annual pension. In this paper, we provide an effective method to evaluate these two government pension methods. Initially, we constructed a pension portfolio consisting of five popular assets, such as the tech giants and popular ETFs. Then we use the Fama-French 3-factor model to calculate the expected returns of every asset. The Sharpe Ratio is the standard to make a choice that accepts the portfolio with a pension or the portfolio without a pension. Except for the Sharpe Ratios, we also took the government debt default and retirement ages into consideration. Government debt defaults contain two types, partial defaults, and full defaults. These two different kinds of defaults can have a significant impact on pension choice. With this method, we could obtain the decision boundary of the pension choice. Investors could utilize this boundary to decide whether to accept a pension or a lumpsum buyout by themselves.

Robust, domain‐specific effects of prior context in risk preferences for pension choice

AbstractEvidence that context changes measured risk preferences raises concerns about the practice of measuring financial risk attitude in one context to guide investment choice. We found that participants who first made choices between pairs of high (low) risk pension funds subsequently preferred higher (lower) risk funds when offered a choice from a wider range of funds. This effect was also observed when the riskiness of the initial pension funds was manipulated within subjects. Effects were not influenced by order, or attenuated by a bias warning. Tests across the domains of recreational and financial risk found that context effects are domain specific and that they influence both choices and judgments. Our results are consistent with theories of relative judgement. However, we also observed some evidence of sensitivity to absolute values. From an applied perspective, understanding such contextual sensitivity is important for recognising the limitations of risk profiling tools as part of a regulated financial advice process.

Unraveling short- and farsightedness in politics

The absence of a deselection threat in incumbents’ last term in office can be negative or positive for the polity. Some politicians may reduce their efforts, while others may pursue beneficial long-term policies that may be unpopular in the short term. We propose a novel pension system that solves the effort problem while preserving the willingness to implement long-term policies. The idea is to give politicians the option to choose between a flexible and a fixed pension scheme. While in the fixed scheme, performance has no impact on the pension, the pension increases with short-term performance in the flexible scheme, using the vote share of the officeholder’s party in the next election as a performance indicator. Such a pension choice improves the well-being of citizens since officeholders are encouraged to invest in those activities that are beneficial for society. We analyze the properties and consequences of such a system. Finally, we extend the pension system with choice to non-last-term situations and derive a general welfare result.

Lessons for public pensions from Utah's move to pension choice

AbstractWe explore what happened when the state of Utah moved away from its traditional defined benefit pension. In its place, it offered new hires a choice between a conventional defined contribution plan and a hybrid plan option, where the latter has both a guaranteed benefit component and a defined contribution plan where employees bear investment risk. We show that around 60% of new hires failed to make any active choice and, as a result, were automatically defaulted into the hybrid plan. Slightly more than half of those who made an active choice elected the hybrid plan. Post-reform, employees who failed to actively elect a primary retirement plan were also far less likely to enroll in a supplemental retirement account, compared with new hires who actively selected a plan. We also find that employees hired following the reform were more likely to leave public employment, resulting in higher separation rates. This could reflect a reduction in the desirability of public employment under the new pension design and an improving economic climate in the state. Our results imply that public pension reformers must consider employee responses in addition to potential cost savings, when developing and enacting major pension plan changes.

Redistribution Effect and Pension Choice: Theory and Evidence

Redistribution Effect and Pension Choice: Theory and Evidence

Second NHS pension choice exercise to begin in autumn

Members of the NHS pension scheme will be given a second chance to decide whether they want to move from the 1995 to the 2008 scheme. Between 2009 and 2012 a choice exercise was run to allow NHS employees to decide whether they wished to move from the 1995 to the 2008 scheme. From September this year to February 2015 around 500 000 eligible members of the 1995 scheme without full protection under the 2015 pension scheme …

Choice blindness in financial decision making

AbstractChoice Blindness is an experimental paradigm that examines the interplay between individuals’ preferences, decisions, and expectations by manipulating the relationship between intention and choice. This paper expands upon the existing Choice Blindness framework by investigating the presence of the effect in an economically significant decision context, specifically that of pension choice. In addition, it investigates a number of secondary factors hypothesized to modulate Choice Blindness, including reaction time, risk preference, and decision complexity, as well as analysing the verbal reports of non-detecting participants. The experiment was administered to 100 participants of mixed age and educational attainment. The principal finding was that no more than 37.2% of manipulated trials were detected over all conditions, a result consistent with previous Choice Blindness research. Analysis of secondary factors found that reaction time, financial sophistication and decision complexity were significant predictors of Choice Blindness detection, while content analysis of non-detecting participant responses found that 20% implied significant preference changes and 62% adhered to initial preferences. Implications of the Choice Blindness effect in the context of behavioural economics are discussed, and an agenda for further investigation of the paradigm in this context is outlined.

Optimism and Pension Choice

This article investigates the relationship between financial optimism and individuals’ pension choice in the UK. The authors used a comprehensive framework for measuring financial optimism and found that the firms that optimists work for are significantly less likely to have pension schemes for their employees. Optimists on average join employers’ pension schemes later than less optimistic individuals. Even when pension schemes are available, optimists are less likely to be members of these schemes. Financial optimism is linked to a lower probability of investing in private pensions. Optimists receive less pension income and are more likely to be working during their 60s and 70s. Financial optimism can trigger a non-participative choice in pension schemes. This article raises awareness among individuals on the role financial optimism plays in affecting their pension choice, either directly through an individual’s attitude towards risk when selecting pension schemes or indirectly via their choice of employment.

Why do individuals choose defined contribution plans? Evidence from participants in a large public plan

We examine individual choices between a defined contribution (DC) and a defined benefit (DB) retirement plan at a large public employer. We find sensible patterns with regard to standard economic and demographic factors: the probability of choosing the DC plan decreases with the relative financial generosity of the DB plans versus the DC plan and rises with education and income. Using a survey of participants, we find that the ability to control for beliefs, preferences, and other variables not easily obtainable from administrative or standard household surveys increases the explanatory power over seven-fold. Among the important factors in the DB/DC pension choice are respondent attitudes about risk/return tradeoffs, financial literacy, return expectations, and political risk. We also find that individuals make sensible choices based on what they believe to be true about the plans, but that these beliefs about plan parameters are often wrong, thus leading to possibly sub-optimal decisions. Finally, we provide evidence that individuals' preferences over plan attributes (e.g., the degree of control provided) are even more important determinants of the DB/DC decision than expected outcomes (e.g., the relative generosity of the plans).

NHS Pension Choice: what does it mean for you?

NHS pensions are under the spotlight more than ever at the moment. The Hutton Report has put public sector pensions, including the NHS scheme, at the forefront of government cutbacks and we are in the middle of the NHS Pension Choice exercise.

Determinants of Defined Contribution Pension Choice in the Japanese Workforce

Using a survey data collected by the Japan Institute of Life Insurance in 2002, this study finds a significant gender gap in DC pension knowledge among workers employed at small- to medium-sized private firms in Japan. Even with similar DC knowledge, however, men and women reveal different preferences for DC pensions, indicating that their perceptional responses may widely differ from actual behaviors. Apart from the knowledge gap, the result shows evidence of the Prince Charming Syndrome among female employees as a significant source of the gender gap in DC participation rates. Among corporate pension covered employees the gender difference in the efficacy of DC portability is a more significant gap-generating factor. DC tax advantage is particularly favored by pension covered female employees over male counterparts, reducing the DC preference gap. Finally, single and unmarried female employees have a significant aversion to DC pensions due to the associated investment risk.

Pension choice trial starts this summer

Pension choice trial starts this summer

Potential implications of mandating choice in corporate defined benefit plans

The evolution of hybrid conversions has prompted a number of high-profile legal challenges. In response, policymakers have attempted to force companies transitioning from a traditional DB to a hybrid plan to offer all workers the open-ended choice of remaining in the old DB plan, versus switching to the new hybrid plan. This paper evaluates ‘winners’ and ‘losers’ under these plan conversions and estimates the cost to plan sponsors of such a mandate. We find that mandating choice could increase plan sponsors' pension expenses above their current cost for traditional defined benefit plans. In the end, rising costs of pensions could endanger plan sponsorship altogether. Policymakers seeking to mandate pension choice should take into account these possible undesirable outcomes of such a law.

Freedom and other variables in the choice of public pension systems

There are three types of public pension systems popular throughout the world: Pay-As-You-Go (defined benefit), Funded (defined contribution), and Mixed. The latter two systems were largely adopted in the 1990s after Chile successfully built its Funded system. In this paper we analyze the choice of these types of pension system, identifying factors that affect countries' choice. Several measures of freedom - economic and political - are associated with these choices. The estimated effects of the two freedoms on pension choice and percent elderly are quite interesting and intuitive.

British Pension Policy in the Twenty‐first Century: a Partnership in Pensions or a Marriage to the Means Test?

This paper analyses how well the latest in a long line of reforms to the British pension system will serve the low-income population and protect against a means-tested old age. We argue that New Labour’s proposals (set out in the Green Paper “A New Contract for Welfare: Partnership in Pensions”) will develop a new relationship between public and private pension provision which leads to a much wider role for means testing. We illustrate our argument by looking at faults written into the design of the pension system and by examining the experiences of the new regime that a range of hypothetical, low-income individuals would have. We find that, contrary to the government’s message, the proposed State Second Pension will not be a replacement for SERPS but will, in fact, combine with the basic pension to provide a new flat-rate pension aimed at the poorest. Low-income individuals and those with broken work histories will face great difficulty in avoiding a means-tested old age. Furthermore, increased reliance on annuity income in retirement may also propel significant numbers of the middle classes into means testing. Far from simplifying the pension system, the proposals will add complexity, making it difficult for individuals to make an optimal pension choice. In conclusion, the proposed pension partnerships are likely to be unsustainable and therefore likely to lead to a continuance of the cycle of pension reform.

Which Pension?: Women, Risk and Pension Choice

This paper investigates women's perceptions of choice and risk in the field of pensions. It extends on a paper published in a recent edition of this journal in which Alan Aldridge applied Pierre Bourdieu's notions of cultural capital and habitus to the field of personal finance. Since the late 1980s the marketisation of pensions has resulted in an expansion of pension options. According to Anthony Giddens the expansion of choice is one of the positive aspects of living in a ‘risk society'. However, the expansion of pension choice has passed pension risks onto consumers. Using qualitative interviews this paper investigates the perceptions of 45 employed women aged 40–59 of the risks associated with choosing a pension. At the theoretical level the paper seeks to demonstrate the need to qualify notions of reflexive decision-making put forward by Giddens by emphasising the role of habitual action in decision-making, as put forward by Bourdieu. The paper shows that material circumstances, cultural capital, extent and quality of pension information and habitus affect perceptions of pension choice and pension risks. The paper concludes that the expansion of pension choice has been, in many ways, negative rather than positive and thus is likely to lead to increasing poverty among many women in later life.

SELECTION AMONG EMPLOYER‐SPONSORED PENSION PLANS: THE ROLE OF INDIVIDUAL DIFFERENCES

Recognizing the explosive growth and increasing importance of alternative forms of retirement plans, this study investigated determinants of employees' choice among the three major types of employer‐sponsored pension plans: defined benefit, defined contribution, and hybrid cash balance. Using a field survey of 2,400 employees who participated in a state sponsored retirement system covering 60 participating employers, we tested a general model of public employee pension choice, and examined the roles of plan feature preferences, employee attitudes, and demographics in pension plan participation choices. The results identified primary predictors distinguishing plan selection and indicated that employees' preferences for plan features explained significant variation in their selection among pension plans. The results challenged the conventional wisdom regarding the nature of pension plan choice and highlighted the critical role played by individual differences.

Pension Choice: An Analysis of U.S. Corporate Financial Characteristics and Post‐Reversion Pension Plan Formation

This paper examines the formation of pension plans from a corporate finance perspective. The theoretical underpinnings for selecting a defined‐benefit or defined‐contribution plan are discussed and used to form empirically testable hypotheses. Linear probability and logit models are used to identify corporate financial characteristics that affect the likelihood of forming a defined‐benefit or defined‐contribution plan. The results strongly indicate that firms with high degrees of debt and intangible assets are least likely to form defined‐benefit plans in a post‐reversion situation, while firm size enhances the probability of forming defined‐benefit plans. The growth in private retirement plans over the past quarter century has made pension fund management a critical concern for many financial managers. The total amount of assets in private pension plans amounted to approximately $150 billion in 1970, while this figure was about $2 trillion in 1989. A corresponding trend to this growth has been an acceleration in the formation of defined‐contribution plans relative to defined‐benefit plans. In 1975 about 29 percent of all plans were defined‐contribution plans, and 71 percent were defined‐benefit plans. In contrast, defined‐contribution plans comprised 55 percent of all plans in 1988, while 45 percent were defined‐benefit plans.1 Gustman and Steinmeier (1987) suggest that the shift to defined‐contribution plans in recent years may be attributable to shifts in jobs in the economy away from the manufacturing sector and toward the service sector. Furthermore, the role of unions, firm size, and administrative costs have also been sighted as factors which partially explain the economy wide shift toward defined‐contribution plans (see Gustman and Steinmeier (1989), Clark and McDermed (1990), and Kruse (1991)). In this paper, we address the pension choice by examining the formation of individual plans from a corporate finance perspective. Specifically, we examine the pension choice issue when firms are faced with making this decision after the termination of an overfunded defined‐benefit plan. The remainder of this paper is organized as follows. Section I discusses the possible motives for selecting one plan over the other, and develops testable hypotheses. The data and methodology are discussed in section II, while section III presents the empirical results. Section IV summarizes and concludes the paper.

Cash flow variability and firm's pension choice: A role for operating leverage

When financial markets are imperfect or financial distress is costly, firms may choose to reduce their risk by lowering financial or operating leverage. This paper examinines the role of operating leverage in the firm's pension choice. Contributions to defined contribution plans are more flexible than contributions to defined benefit plans. Firms may therefore reduce their operating leverage by selecting a defined contribution plan. I find empirical support for this hypothesis which is robust to controls for labor market factors and the continuing trend toward defined contribution pension plans.