Collective pension schemes and individual choice

Sustainability of participation in collective pension schemes: An option pricing approach

The Allocation of Financial Risks During the Life Cycle in Individual and Collective DC Pension Contracts

This opening contribution to the book Costs and Benefits of Collective Pension Systems, an initiative of the Association of Industry-Wide Pension Funds and the Erasmus University of Rotterdam, first discusses a number of general solidarity aspects. Next it deals with more specific issues that have an important bearing on the pension sector.

Michael Otsuka argues that collective pension schemes are forms of social cooperation on equal terms for mutual advantage and thus, matters of social justice. In this way Otsuka wants to understand collectively funded pensions in Rawlsian terms. I argue that not all forms of social cooperation are the same and that the specific kind of social cooperation Rawls has in mind is, in at least three central respects, different from the kind of social cooperation involved in the collective pension schemes Otsuka describes.

Corporate defined-benefit plans suffer from a number of serious weaknesses, including credit risk of the sponsor, ambiguous ownership of the surplus and back-loading of benefits. Also defined-contribution plans feature drawbacks. Individuals are not well equipped to make the complex financial decisions involved, transaction costs are substantial and various risks are not managed properly over the life cycle. Stand-alone collective pension schemes offer an attractive third way between corporate defined-benefit schemes and individual defined-contribution schemes. The members of the fund are the risk bearers and the funds manage risk aimed at providing an adequate income level during retirement at low costs. Dutch pension funds are evolving into such stand-alone pension schemes. Some directions for future reforms are sketched. Copyright The Author(s) 2009

Never has there been so much media interest in pensions as there is currently. Never has the pensions world changed so rapidly as it has over the last few years; we have seen the introduction of a new state supplementary pension scheme, new stakeholder pensions, and a flood of companies closing their final salary schemes and replacing them with defined contribution schemes. Never have there been so many complaints about our pension system; about the state pension falling behind earnings, about the misselling of personal pensions, about the perceived poor value of annuities, and about high charges and poor investment performance. This new edition of Pension Schemes and Pension Funds in the United Kingdom provides the latest information on all the key state and private pension schemes operating in the UK, including: the basic state pension, minimum income guarantee and pension credit; the state second pension; company pension schemes; and personal and stakeholder pension schemes. It does this within the context of the long historical development of the UK pensions system since medieval times. It also examines government pensions policy over the last twenty years, in particular the reduction in state pensions and the transfer of the burden of pension provision to the funded private sector. It also examines future trends and future concerns, such as increasing longevity and the adequacy of savings for retirement when people are young and in work. As most pension schemes are funded, the author also examines the latest issues in pension funding, such as the new accounting standard FRS17, active and passive fund management, investment risk budgeting and management, global investment performance standards, short-termism and the Myners review of institutional investment. The book concludes with a proposal for the Ideal Pension Scheme.

Paying for Pensions An International Comparison of Administrative Charges in Funded Retirement-Income Systems

PurposeThis study aims to explore the views of pension beneficiaries and fund managers regarding greater involvement and investment autonomy and the attitudes toward diverse responsible investment criteria. The conventional form of investing is usually vulnerable to high financial market volatility events and financial crises, and most importantly, it has proven insufficient in addressing important social issues. A newly introduced investment culture known as impact investing strives for social gains in the long term rather than the maximization of financial returns by aiming to tackle social problems. However, some in the field claim that implementing such investment policies compromises the fiduciary responsibility of pension funds’ trustees to manage trust funds in the best interest of beneficiaries.Design/methodology/approachThis study uses qualitative methods to explore the perception of proposed pension policies, such as beneficiaries’ greater involvement in determining pension investment policies that can have a positive long-term impact on their lives and on the provision of investment autonomy. For this purpose, the study investigates beneficiaries’ positions regarding responsible investment criteria from a freedom-of-choice perspective. The study sample consists of members and managers of a Dutch pension administrative organization with a cooperative structure. Three semi-structured, homogeneous discussions with focus groups containing between seven and nine participants each are conducted. The data are coded both deductively and inductively, following the framework approach, which is a qualitative data analysis method.FindingsParticipants demonstrate positive attitudes toward greater involvement and freedom of choice. However, the findings also indicate that members and pension fund managers have different views regarding responsible investment criteria. Members have more favorable attitudes toward responsible investment than do managers.Research limitations/implicationsThis research is limited to focus group discussions with managers and members in the Dutch healthcare sector.Practical implicationsHow little the current pension system matches people’s investment preferences is a matter of concern, and the main implications of this research thus center upon designing a more democratic pension system for the future. Greater involvement by pension fund beneficiaries, whose roles are currently limited, would help legitimize responsible investing. This research implies that pension policies should be designed to align with the preferences of pension fund beneficiaries and be accompanied by diverse intervention strategies.Social implicationsPension reforms that encourage pension beneficiaries to exert greater influence in determining pension policy will help shrink the democratic deficit in collective pensions.Originality/valueThis study contributes to the literature on pension fund governance and long-term responsible investing by examining the attitudes toward impact and sustainable investments and by making suggestions for future research. To the best of the authors' knowledge, this study is the first to investigate the attitudes of pension fund participants toward targeted impact investments.

Purpose: In Ghana, recently the financial performance of the private pension schemes has gone up tremendously. The purpose of this study is to investigate how risk management methods influence the financial performance of private pension schemes. Design/Methodology/Approach: The study randomly selected, 450 private pension managers that have existed for at least five years. Financial reports from these schemes were used to analyse key financial indicators, which include the return on assets (ROA) profitability ratio, the company’s size, net investment income, and contribution to the total fund ratio. The research investigation looks at how approaches to risk management affect these pension funds’ financial performance by employing a hierarchical multiple regression model. Findings: The results demonstrated a strong correlation between firm size, net investment income, contribution to total funds, and the financial performance of private pension funds. From the hierarchical multiple regression model, specific risk management practices, such as those related to stakeholders involved in policy formulation, the risk management framework, response strategies mitigation and enhancement, and internal controls, were identified as significant contributors to the financial performance of pension funds. Practical Implications: The study suggests that the National Pensions Regulatory Authority (NPRA) should adjust investment guidelines based on these insights, empowering pension fund managers to implement effective risk management practices. Originality/Value: Research on risk management has predominantly been in the banking sector leaving the pension schemes. This study bridges the gap by studying the contributions of pension fund risk management strategies to the astounding rise of the financial performance of private pension schemes.

The Economic Function of Underfunded Pension Plans

The role of formal volunteering in mental health promotion among older adults in China has been widely discussed during recent decades. However, the relationship connecting mental health with cross-level interaction (i.e., average levels of participation in the community vs. individual participation) is still unclear. This paper examined the effects of cross-level formal volunteering on depressive symptoms among older adults living in China. Using two waves of the China Longitudinal Aging Social Survey, a sample of 3128 Chinese older adults was surveyed in 2014 and 2016. Depressive symptoms were measured using the abbreviated CES-D-9. Individual fixed-effects ordinary least squares regression models assessed the associations between individual- and community-level formal volunteering and depressive symptoms in urban and rural areas separately. We found that in the urban sample, formal volunteering activities were negatively associated with depressive symptoms at the individual level (β= -0.49, SE= 0.22, p< 0.05). Higher community-level formal volunteering was positively associated with depressive symptoms (β= 2.82, SE= 1.42, p< 0.05). When adding interactions between individual and community levels, engagement in individual-level formal volunteering was associated with lower rates of depressive symptoms as community volunteering participation levels increased (β= -3.07, SE= 1.07, p< 0.01). High community-level volunteering participation was detrimental for non-volunteers. In rural areas, neither community- nor individual-level formal volunteering was associated with changes in depressive symptoms. The current findings demonstrate formal volunteering may not always benefit mental health for all. The effects may depend on the community context and individual choices. Social policies aimed to promote mental health through formal volunteering need to be tailored according to the specific community social environment.

Investment Choice in Defined-Contribution Pension Schemes: International Experience and Policy Issues

Pension schemes are major institutional investors, and investment performance has important consequences for pension schemes. In 2014 the assets under management of the largest 300 pension schemes in the world were $15.4 trillion, or an average of $51.3 billion for each scheme (Towers Watson 2015). There are also many tens of thousands of smaller pension schemes, and in 2014 they had assets of roughly $20.7 trillion (Towers Watson 2015). In 2012 pension schemes in the OECD countries had assets worth $32.1 trillion, representing 41 % of the assets held by institutional investors (OECD 2013b). Table 3.1 lists the 45 largest occupational pension schemes in 2014, and shows that 27 of these schemes are American and five are Dutch. Over half of these 45 schemes are for public sector workers, and only a quarter are large corporate schemes.

The study investigated the impact of corporate governance (CG), investment strategy (IS) and macroeconomic variables on the financial performance of pension schemes in Kenya thereby addressing the key research question: What is the effect of CG, IS and macroeconomic variables on the financial performance of pension fundsin Kenya? Qualitative, quantitative and correlationalresearch designs were used to assessthe effect of these factors on financial performance of pension funds. Quantitative data on annual return of pension funds and macroeconomic variables from 2012 to 2020 as well as qualitative data on CG indicators and IS were used in the study. Return on investments proxied pension fund performance. Primary data was collected using survey questionnaires from the pension schemes from both the CG and IS indicators to develop both CG and IS indices. The findings show that CG as well as IS and macroeconomic variables impact differently pension funding. Effect of CG indicators on pension performance was positive and significant. The intervening effect of IS on the link between CG and pension performance was significant while the moderating effect of macroeconomic variables was significant. The individual contribution of both CG indicators and macroeconomic factors on pension performance, nonetheless varied. The main conclusion of the study is that pension fund financial performance is influenced by CG, IS and macroeconomic factors implying that there is need to take into account the impact of these factors in the execution of investment plans of pension funds to ensure generation of adequate funds for retirement benefits

On Efficiency of Mean-Variance Based Portfolio Selection in DC Pension Schemes