Designing Pension Systems with Coherent Funded Private Pillars Including Issues for Notional Defined Contribution Schemes
This paper reviews the factors that should guide the design of private funded pensions to create a complete pension system alongside a notional defined contribution—or public—component. It argues that a mix of public and private pensions is the mos...
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| Format: | Working Paper |
| Language: | English |
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World Bank, Washington, DC
2018
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| Online Access: | http://documents.worldbank.org/curated/en/238221525096188495/Designing-pension-systems-with-coherent-funded-private-pillars-including-issues-for-notional-defined-contribution-schemes http://hdl.handle.net/10986/29757 |
| Summary: | This paper reviews the factors that
should guide the design of private funded pensions to create
a complete pension system alongside a notional defined
contribution—or public—component. It argues that a mix of
public and private pensions is the most effective option to
deliver the best combination of pension outcomes. Pension
design should start with a vision for five core outcomes:
coverage, adequacy, sustainability, efficiency, and
security. Thinking through these outcomes helps guide
choices for market structure, benefit type, contributions,
investment strategy, and other factors. As well as technical
design, the governance, scale, and expertise of pension
funds are critical for good investment and other outcomes.
Regulators and supervisors should also focus on these
outcomes and then work out how best to mitigate the risks to
achieving them over time. These issues are relevant in
relation to any public pillar, but notional defined
contribution (NDC) systems bring clarity and transparency to
policy makers in the benefit formula. The NDC payout formula
can offer insights for how to improve the payout options in
funded pillars. The clarity on the NDC formula also means
that the joint distribution of public and private pensions
can be modeled. This is important because the precise NDC
formula may have implications for optimal investment
strategies for private pensions, given, for example, the
negative correlation between real per capita GDP growth and
equity market returns over long periods. |
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