Personal Pensions with Risk Sharing. Affordable, Adequate and Stable Private Pensions in Europe

Abstract

Private pension provision faces the challenging task of providing stable income streams during retirement. The challenge has increased markedly in the last decades due to volatile financial markets, falling interest rates and the withdrawal of employers and external insurers as risk bearers of systematic financial and longevity risks. Partly because of these developments, policyholders desire pensions tailored to their individual needs. This paper proposes a new type of pension: the Personal Pension with Risk sharing (PPR). By unbundling and valuing the investment, (dis)saving, insurance and risk-sharing functions of pensions, PPRs allow risk management and (dis)saving to be customized to the specific features of heterogeneous individuals. Moreover, unlike variable annuities, PPRs allow investment risks to be combined with longevity insurance without giving rise to high year-on-year volatility in consumption streams or opaque and rigid valuation and smoothing rules. The unbundling of functions in the PPR also deepens the internal markets for financial and insurance products while at the same time accommodating the diverse traditions of countries in terms of occupational pension provision. Finally, the PPR reconciles financial, fiscal and macroeconomic stability with growth by increasing the supply of long-term risk-bearing and illiquid capital, complementing public retirement provision, reducing the interest-rate sensitivity of pensions and smoothing shocks. 1 The authors thank Casper van Ewijk for helpful comments on an earlier draft. Errors and misperceptions remain the exclusive responsibility of the authors.

Intergenerational Actuarial Fairness When Longevity Increases: Amending the Retirement Age

“…Countries have introduced and adjusted the links to life expectancy in multiple ways, as recognised and discussed in numerous contexts, including our own work (Alho et al 2013;Bovenberg et al 2015;OECD 2019;Holzmann et al 2020;Ayuso et al 2021a). The topics of interest fall under a number of categories: (i) automatically indexing normal and early retirement ages (Denmark, the Netherlands, Slovakia, Greece, Portugal, the United Kingdom, Italy, Finland, Estonia, Norway); (ii) linking newly granted pensions to sustainability factors or life expectancy coefficients (Portugal, Spain 1 , Finland), or to old-age dependency ratios (Germany, Japan); (iii) transforming public earnings-related plans into nonfinancial defined contribution (NDC) schemes (Sweden, Italy, Poland, Latvia, Norway), which automatically adjust retirement benefits to life expectancy in the process of annuitisation of individual account balances; (iv) determining the qualifying conditions for an old-age pension, for instance, by indexing the number of contribution years required for a full pension to life expectancy (Italy, France); (v) introducing risk-sharing arrangements in public and private individual or employer-sponsored pension plans (the Netherlands, the United States, Belgium); (vi) introducing mandatory and voluntary funded defined contribution (DC) schemes to replace or supplement public pension provisions (Chile, Sweden, Estonia, Switzerland, Israel, Hungary, Australia, Mexico, Poland, Slovakia); (vii) conditioning the annual indexation of pensions in payment to a scheme's solvency position (the Netherlands); and (viii) linking pension penalties (incentives) for early (late) retirement to the contribution length (Portugal).…”

The decumulation period of a personal pension with risk sharing: investment approach versus consumption approach

“…While the work by Bovenberg and Nijman (2015) is descriptive in nature, this paper formalizes the decumulation period of a PPR. We define the pension contract in terms of various parameters such as the investment policy and the median growth rate of the benefit payout.…”