Guarantees - Counting the Cost of Guaranteeing Defined Contribution Pensions
Different types of pension involve different kinds of uncertainty. For example, public sector pension schemes involve a 'policy risk', that the scheme might be reformed in the future so that benefits turn out differently than expected. Pr...
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| Format: | Brief |
| Language: | English |
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Washington, DC
2012
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| Online Access: | http://documents.worldbank.org/curated/en/2005/01/6259019/guarantees-counting-cost-guaranteeing-defined-contribution-pensions http://hdl.handle.net/10986/11239 |
| Summary: | Different types of pension involve
different kinds of uncertainty. For example, public sector
pension schemes involve a 'policy risk', that the
scheme might be reformed in the future so that benefits turn
out differently than expected. Private pension schemes are
less subject to this policy risk, because governments are
unlikely to confiscate private property. But
defined-contribution pensions do involve capital-market risk
during the accumulation phase, when contributions and
investment returns build up in the fund. The risk is that
the pension fund's performance is insufficient to give
an individual member an adequate retirement income. This
note reviews the different types of guarantees, suggesting
guarantees of the returns from funded pensions can gain
support for reform; but poorly designed guarantees can
undermine it, and create large liabilities. The cost of
guarantees should be made as transparent as possible, while
option-pricing models can be used to illustrate the cost of
guarantees, to inform the decision to offer guarantees, the
type of guarantee, and how large it should be. Transparent
financing of guarantees is best served by forcing funds to
put aside their own assets; this also provides better
incentives for fund managers. |
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