Controlling a demographic wave in defined contribution pension systems

Abstract

In several developed countries, the baby boomers will come to retire in the next decades. This problem will threaten the sustainability and the inter- generational equity of mandatory pay-as-you-go pension systems because they will have to drain the “demographic wave” of retirees with a relatively small number of contributors. In this paper, we give the operating method developed on the basis of a general principle, which a defined contribution pension system, in a state of stable sustainability, should adopt to control these issues in the presence of a demographic wave. In the theoretical profile, our approach breaks and overcomes the classical juxtaposition between funded and pay-as-you-go pension schemes, carrying out the integration of the two financial methods

The optimal rate of return for defined contribution pension systems in a stochastic framework

“…In the 1,027 remaining scenarios, D c (t), and namely the fund, is found to be negative for at least one year. For the extension of the logical sustainability model in the case of the negative fund, see [21]. However, it should be noted that rule 6 also holds in order to stabilise β(t) in the case of the negative fund, as can be easily verified.…”

“…Developed in a non-steady state context, it is based on a mathematical formalization of pension systems rather than on actuarial forecasting, and, owing to this feature, it is able to provide logical rules leading to the financial sustainability. It substantially refers to DC pension systems with a structural funded component, where "structural" does not mean a buffer reserve, like in the Swedish system, but refers to a funded component organically inserted in the pension scheme and whose financial returns are redistributed to contributions and benefits, either in a steady state of general stability (see [19,20]) or in a stable state temporarily disrupted by a demographic and/or economic wave (see [21,22]). For the described features, the logical sustainability approach designs a consistent mathematical model to be used in order to support decisions for the proper choice of the sustainable rate of return on the pension liability in a non-steady state.…”

The Logical Sustainability Theory for pension systems: the discrete-time model in a stochastic framework under variable mortality

“…Notice that L U N k+1 does not depend on the payment of contributions and pensions in k + 1. By (12), it follows that the evolution equation of the funded pension liability is provided by the evolution equation of the fund, see (2).…”

“…In the model transformation from the continuous to the discrete framework, the section concerning the management of a demographic/economic wave will be developed in future research; see [12,13] for the development of this issue in the continuous framework.…”

The shift to the defined contribution pension scheme: an Italian case

“…The logical sustainability theory also considers the case of a negative fund, hence the case in which the weight D c (t) given by the ratio between the fund F(t) and the pension liability L(t) assumes negative value. For further details see the extension of the logical sustainability theory in the case of a negative fund carried out in Angrisani and Di Palo (2014).…”