Subjective Economic Risk to Beneficiaries in Notional Defined Contribution Accounts

Abstract

This article aims to quantify the "aggregate subjective economic" risk to which beneficiaries would be exposed if a retirement pension system based on notional account philosophy were introduced. We use scenario generation techniques to make projections of the factors that determine the real expected internal rate of return (IRR) and the expected replacement rate (RR) for the beneficiary according to six retirement formulae based on the most widely accepted rates or indices. We then apply the model to the case of Spain. Our projections are based on Herce and Alonso's macroeconomic scenario 2000-2050 (2000) and include information about the past performance of the indices and the time period the forecast is to cover. The results of the IRR calculation-average value, standard deviation, and value-at-risk (VaR)-are analyzed both in objective terms and for different degrees of participants' risk aversion. Copyright The Journal of Risk and Insurance, 2006.

Towards an adequate and sustainable replacement rate in defined benefit pension systems: The case of Spain

“…This highlights one of the disadvantages of the RR: it does not to take into account the total amount of contributions. An actuarial criterion is also used to determine the initial pension. General average premium systems with defined contributions (also termed notional account systems) have certain features similar to those found in capitalization systems, but it is necessary to replace the interest rate risk by the risk attached to variations in the index used to revalue the amount of virtual contributions (see, for example, Disney (), Palmer (), or Vidal Meliá, Domínguez Fabían and Devesa Carpio ()). In addition, the formula used to calculate the initial pension may differ from that used in capitalization systems, and the mortality tables used do not normally differentiate between men and women.…”

Financial and Social Sustainability Pension Systems in the Face of Demographic Risks

“…The impact of demographic risks on pension systems is estimated by considering their impact on such indicators as pension payments and replacement rate. In economics, these indicators tend to be considered as the most important targets of pension systems Vidal-Meliá et al (2006). The International Labour Organization has made reports containing the recommended minimal and optimal values of the replacement rate.…”

The Value and Risk of Defined Contribution Pension Schemes: International Evidence

“…Basu and Drew (2010) examine alternative risk measures in simulated DC plans for Australia. Vidal‐Meliá, Domínguez‐Fabián, and Devesa‐Carpio (2006) simulate the risks in a notional DC scheme. Blake, Cairns, and Dowd (2001) estimate the riskiness of DC pension plans during the accumulation phase and find that they are much riskier than a DB alternative.…”