Current and expected demographic and economic trends are likely to jeopardize the financial sustainability of the French retirement pension scheme, which mainly operates on a pay-as-you-go basis. In 1999, the French government set up a Pension Reserve Fund (Fonds de réserve pour les retraites, FRR) the main objective of which was to introduce some public funding in the PAYG basic pension scheme to cope with its expected financial unsustainability within the next decade. This paper presents some simulation results on the projected evolution of the French Pension Reserve Fund under various assumptions. The main idea is to optimize the profile of the trend in contribution rates needed to meet the objective of a balanced basic pension scheme over the period 2006–2050. Our simulations show that under plausible assumptions the amount of funding is likely to be less important than the Government expected at the FRR set up, about 100 billion euros. Some stress tests show that severe shocks on financial markets may dramatically affect the funding profile of the FRR beyond 2045.

This paper analyzes optimal investment policies for pension funds of a defined benefit (DB) type. The nature of a DB fund induces a natural modeling of preferences being of the mean-downside risk type. With compensation for inflation as an explicit goal of a pension fund, a natural reference point for the risk measure is the future (indexed) value of the liabilities. Results are presented for different levels of inflation uncertainty and its correlation with stock returns. The optimal decision rules show increased risk-taking for funding ratios moving away from the discounted value of the reference point. Furthermore, it is shown that the outcomes are comparable with those using a mean-downside deviation criterion. We provide intuition for the results and compare the outcomes with actual investment policies of six large Dutch pension funds.

It is well documented that US defined contribution pension plans are largely invested in the shares of their employer. I argue that when the (single representative) worker holds shares in the firm, he tends to monitor the manager. On the one hand, the manager and shareholders gain from the productivity of the worker. On the other hand, the manager bears the cost of being monitored by the worker, and the shareholders loose part of their ownership power to the worker. Therefore, there is an optimal ownership limit for the worker from the viewpoint of the firm. I derive conditions under which the worker will never invest in the firm's stock if he has the freedom to do so. Nevertheless, under alternative conditions, it will be advantageous for the worker to invest his pension assets heavily in company stock, even if the under-diversification cost is very high.

Among the requirements a pension plan must meet to qualify for tax benefits are the nondiscrimination rules. Nondiscrimination rules are designed to ensure that pension benefits do not disproportionately accrue to highly compensated employees. But the rules are also complex and increase administrative and compliance costs associated with offering a pension plan. Recent pension reform proposals would simplify nondiscrimination rules, reducing administrative and compliance costs and potentially leading to more employers offering pension benefits. However, there are concerns that any loosening of the rules could lead to a drop in participation by low-wage workers. This paper examines the economic incentive that nondiscrimination rules provide to employers to cross subsidize employees; that is, the incentive to increase pension benefits (and total compensation) paid to low-paid workers for the express purpose of enabling high-paid workers to receive a higher proportion of compensation in the form of pension benefits. The study calculates the incentives faced by a hypothetical firm, and then illustrates how those incentives change when assumptions about employee contribution behavior, employee compensation, and employer-matching formulas are allowed to vary. Results show that only firms with a relatively low ratio of low-paid workers to high-paid workers would have an economic incentive under a standard 401(k) plan to cross subsidize employees. Although this incentive may exist in a large number of firms, these firms likely employ only a small portion of the workforce. This is ultimately an empirical question, however, and examining data on the distribution of earnings within pension plans, as well as determining if firms find nondiscrimination rules binding, would be a useful extension of this research.

We investigate delegated investment management in private pension accounts using data from Australian accumulation (superannuation) funds. In Australian non-profit pension funds, trustees choose investment managers on behalf of members. We find that funds with many delegated managers have higher risk-adjusted returns than those with few. However funds with 13 or less specialized managers show no improvement over funds with a single diversified manager. All do worse than a benchmark portfolio of asset-class indices. Further, by using random selection to mimic the choices of an uninformed individual choosing from the same menu of delegate managers as used by trustees, we show that returns from pension funds with large numbers of trustee-selected managers compare favorably with returns from randomly selected, equally weighted portfolios. However this improvement falls off quickly for funds with fewer trustee-selected managers, or when randomly selected portfolios are also diversified across asset classes. Results indicate that an uninformed individual following a naive diversification strategy would have done as well as most trustee boards in this sample.

Many organizations have either already terminated their defined benefit (DB) plans or are thinking about it, in order to offload the financial and regulatory risks these programs pose. But plan sponsors should think carefully about how their decision might affect their workers' commitment and productivity – and ultimately their organization's success.

To answer those and other retirement questions, Watson Wyatt set out to learn how DB and defined contribution (DC) plans affect employees' workforce behavior and decisions. Watson Wyatt's Retirement Attitude Survey (WWRAS) found that, while most workers value both types of plans very highly, workers with DB plans generally appreciate their retirement programs significantly more than those with only a DC plan. This was particularly the case for those with a hybrid pension plan. This analysis found that retirement plan generosity and effective communication strongly affect a plan's perceived value to employees. This has important implications for plan sponsors, since greater plan appreciation is strongly linked to employee commitment. In fact, we found that workers covered by a defined benefit plan express a very strong commitment to their current employer, while DC plan coverage has no effect on employee commitment. This is partly owing to a selection effect, whereby firms with DB plans tend to attract more committed workers. However, even after controlling for the selection effect, DB plans exert an independent effect on the likelihood that employees will stay with their employer.

The Pension Benefits Guarantee Fund (PBGF) was established in the province of Ontario in 1980, thus creating in Canada a rare opportunity for intranational empirical research on the impacts of governmental protection on private plans and their participants. This paper examines Canadian data on pension plans for effects attributable to Ontario's government guarantees for some plans. We find that significant variables related to an increase in the number of pension plans in Canada are higher interest rates, a larger labour market, and, consistent with the deferred compensation theory from labour economics, lower real disposable income of workers. The number of members in pension plans is related significantly to the same variables and also to tax rates and unemployment. The analyses show that the Ontario environment for pension plans is significantly different from the rest of Canada. Those plans covered by the Pension Benefit Guarantee Fund exhibit a lower degree of funding per participant than do the remainder of the plans in the sample, supporting the argument that a government guarantee is related to a moral hazard problem in Ontario pension financing.

This paper solves and simulates a stochastic life-cycle model of an economy with 401(k) plans. We use the model to establish a benchmark for patterns of contributions and participation and show how these patterns depend on such features as employer matching, vesting policies, and the ability to make early withdrawals. Consistent with empirical studies, the model predicts relatively low participation rates among younger workers and shows that these rates tend to rise with more generous matching, lower vesting periods, and improved liquidity.

Empirical analyses of annuities markets have been limited to a few developed countries and restricted by data limitations. Chile provides excellent conditions for research on annuities due to the depth of its market and the availability of data. The paper utilizes an extensive dataset on individual annuities to examine econometrically a measure of market performance – money's worth ratios (MWRs), or the ratio of the expected present value of annuity payments to the premium. The results show that annuitants in Chile have generally got a good deal for their premiums, as indicated by MWRs higher than one and also higher than those estimated for other countries. The difference between Chile and other countries is striking considering that annuities in Chile are indexed to prices. The wide range of indexed instruments in Chile, allowing providers to hedge their risks while extracting higher returns, helps explain the difference. The high degree of market competition has also contributed to this outcome. Efforts to improve market transparency through a new electronic quotation system have decreased the dispersion of MWRs. Finally, MWRs tend to decrease for contracts with longer durations, reflecting pricing for higher longevity and reinvestment risks. These results are consistent with separate research on the annuity rate, and indicate the need to ensure competition and market transparency, as well as to develop appropriate financial instruments for providers in order to ensure good outcomes for annuitants.

I explore the diversity among pension plans offered to faculty at 52 Canadian universities. Far from displaying homogeneity, I find marked differences between the plans, both in their structure (DB, DC, and hybrid) and in the replacement ratios from those plans. Using financial simulations I construct representative pension payoff profiles for each plan and find expected replacement ratios (the annual annuity stream available at retirement expressed as a percentage of final wages) ranging from 54.3% to 88.2% and internal rates of return on contributions varying from 10.39% to 18%.

An important research programme in the social sciences concerns the theory and practice of individual decision-making under conditions of risk and uncertainty. At the same time, it is apparent that western governments increasingly rely upon individuals to plan and maintain savings programmes to meet their income aspirations: the long-term retirement income of those outside of the welfare state depends a great deal on the competence and consistency of individual decision-making. In this paper, we use a set of problems requiring the same techniques of judgement to test the consistency of trustee decision-making. Respondents were a group of trustees drawn from select UK defined benefit pension plans compared with a larger group of Oxford undergraduates. It was found that many respondents were inconsistent across related problems requiring the application of probabilistic judgement. It is also shown that trustees were more consistent than many undergraduates and it appears that trustee education and professional qualifications can make a positive difference to consistent decision-making. A more challenging test that depends upon understanding the relationship between demographic ageing, immigration, and the financing of pay-as-you-go social security suggests that substantive knowledge and consistency of judgement are crucial components of expertise. Implications are drawn for the trustee institution and the wider debate over the role and significance of individual decision-making with respect to income aspirations.

This paper focuses on the nexus between pension funds' balance sheet liabilities, reflecting their age profile and payments obligations, and the investment behavior and costs of these funds. The context of the analysis is the stringent regulatory framework and the highly fragmented and heterogeneous pension fund landscape in Switzerland. Detailed data from the Swiss Pension Statistic are analyzed using multivariate OLS-regressions. The evidence shows that a younger age structure and lower short-term benefits payouts are related to a higher share of equities and lower real estate holdings. Legal form, pension plan type, and size are important for administrative costs. The findings support the view that aging may lead to increased risk aversion and thus to a lower engagement of institutional investors in equities.