As we begin the fourth volume of the Journal of Pension Economics and Finance, we are pleased that the Journal has begun to achieve important parts of its mission of being an influential contributor to the debate on pension provision. The Journal is now in about half of the top US academic libraries and is also indexed by EconLit and AgeLine. Pension and social security issues continue to be on top of the policy and research agenda in most major countries. As the first and only academic journal focusing entirely on pension economics and finance, the Journal of Pension Economics and Finance has been in a unique position to contribute to the public debate.

This issue features two research articles, three issues & policy articles and a book review section. The first article in the issue is by Berthold Wigger (University of Erlangen-Nuremberg). Wigger's article, “Public Pensions and the Role of Real versus Financial Capital”, revisits the Diamond (1965) model in light of the imperfect markets framework of Magill and Quinzii (2003). Whereas in Diamond (1965), the introduction of a social security system can make a transition generation better off, Wigger derives an equilibrium in imperfect markets in which the outcome is different. The essential difference is that in Diamond's model capital can be changed into consumption goods whereas in the Magill and Quinzii (2003) framework the investment in capital goods such as their housing is irreversible. Though the old benefit from the introduction of social security, the value of their capital goods declines. Hence, the abnormal gains observed by transition generations in social security may be offset elsewhere. This is a potentially relevant result for the US social security debate in which a key focus is how to allocate the legacy burden of social security.

The paper introduces an unfunded public pension program into an overlapping generations framework recently proposed by Magill and Quinzii (2003). The crucial distinction of the Magill and Quinzii framework is that the financial value of a firm may be lower than the replacement value of its capital. The present paper shows that in this framework unfunded public pensions negatively affect the financial value of firms but have no effect on real capital accumulation and welfare.

Knowledge of the distribution function of the stochastically compounded value of a series of future (positive and/or negative) payments is needed for solving several problems in an insurance or finance environment, see e.g. Dhaene et al. (2002a,b). In Kaas et al. (2000), convex lower-bound approximations for such a sum have been proposed. In case of changing signs of the payments however, the distribution function or the quantiles of the lower bound are not easy to determine, as the approximation for the random compounded value of the payments will in general not be a comonotonic sum.

In this paper, we present a method for determining accurate and easy computable approximations for risk measures of such a sum, in case one first has positive payments (savings), followed by negative ones (consumptions).

This particular cashflow pattern is observed in ‘saving–consumption’ plans. In such plans, a person saves money on a regular basis for a certain number of years. The amount available at the end of this period is then used to generate a yearly pension for a fixed number of years. Using the results of this paper we can find accurate and easy to compute answers to questions such as: ‘What is the minimal required yearly savings effort, α, during a fixed number of years, such that we will be able to meet, with a probability of at least (1−ε), a given consumption pattern during the withdrawal period?’

This paper discusses fees and costs of pension companies in transition economies drawing on examples from four countries – Croatia, Hungary, Kazakhstan and Poland – where second pillar pensions have the longest history of implementation. It finds that at current levels, charges are likely to reduce returns on individual account balances by around 1% per annum on average. Exact rates vary by country and company. Fee structures are complex and, generally speaking, poorly understood by consumers. The limited information on costs that is available suggests that, by and large, companies are able to meet their operating costs within a few years after starting operations. There are large sunk costs in setting up business. As a result the industry displays strong economies of scale. Based on the available evidence, the paper estimates fixed costs to be of the order of $35 per account per year (the 95% confidence interval is $21–$49 per account per year). Given costs of this order of magnitude, individual accounts need to be of the order of 4–6% of average wages for the second pillar to be viable i.e. to deliver a return greater than what can be expected from an unchanged first pillar.

Over the last half century UK defined benefit pension schemes have followed the cult of the equity by investing a large proportion of their assets in equities. However, since the turn of the millennium this cult has faced two serious challenges – the halving of equity prices, and the complete rejection of equity investment by the Boots pension scheme in 2001. This paper summarises the history of the cult in the UK and the arguments advanced at the time to support its adoption. It then presents the case for the cult (excluding taxation, risk sharing and default insurance). This is followed by a detailed consideration of the validity of this case, including an examination of the relevant empirical evidence. It is concluded that, in the absence of taxation, risk sharing and default insurance, the asset allocation is indeterminate; and depends on the risk-return preferences adopted by the trustees.

This paper shows that the capital market effects of population aging and pension reform are particularly strong in continental European economies such as France, Germany, and Italy. Reasons are threefold: these countries have large and ailing pay-as-you-go public pension systems, relatively thin capital markets and less than benchmark capital performance. The aging process will force the younger generations in these countries to provide more retirement income through own private saving. Capital markets will therefore grow in size and active institutional investors will become more important as intermediaries. The aim of this paper is to show that these changes are likely to generate beneficial side effects in terms of improved productivity and aggregate growth.