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The pensions crisis is a predicted difficulty in paying for corporate, state, and federal pensions in

the United States and Europe, due to a difference between pension obligations and the resources

set aside to fund them. Shifting demographics are causing a lower ratio of workers per retiree;

contributing factors include retirees living longer (increasing the relative number of retirees, and

lower birth rates (decreasing the relative number of workers, especially relative to the !ost"##$

%aby %oom. There is significant debate regarding the magnitude and importance of the problem, as

well as the solutions.&'

)or e*ample, as of $++, the estimates for the underfunding of the United States state pension

programs range from -' trillion using the discount rate of to -/.$/ trillion using U.S. Treasury

bond yields as the discount rate. &$&/ The present value of unfunded obligations under Social

Security as of 0ugust $+'+ was appro*imately -1.2 trillion. 3n other words, this amount would have

to be set aside today such that the principal and interest would cover the program4s shortfall between

ta* revenues and payouts over the ne*t 51 years.&2

Some economists 6uestion the concept of funding, and, therefore underfunding. Storing funds by

governments, in the form of fiat currencies, is the functional e6uivalent of storing a collection of their

own 37Us. They will be e6ually inflationary to newly written ones when they do come to be used. &1

8eform ideas are in three primary categories9 a 0ddressing the worker"retiree ratio, via raising the

retirement age, employment policy and immigration policy; b 8educing obligations via shifting from

defined benefit to defined contribution pension types and reducing future payment amounts (by, for

e*ample, ad:usting the formula that determines the level of benefits; and c 3ncreasing resources to

fund pensions via increasing contribution rates and raising ta*es.

Background&edit

The ratio of workers to pensioners (the support ratio is declining in much of the developed world.

This is due to two demographic factors9 increased life e*pectancy coupled with a fi*ed retirement

age, and a decrease in the fertility rate. 3ncreased life e*pectancy (with fi*ed retirement age

increases the number of retirees at any time, since individuals are retired for a longer fraction of their 

lives, while decreases in the fertility rate decrease the number of workers.

3n '<1+, there were 5.$ people aged $+=>2 for every person of >1 or over in the 7E?@ countries. %y

'<+, the support ratio dropped to 1.' and by $+'+ it was 2.'. 3t is pro:ected to reach :ust $.' by

$+1+. The average ratio for the EU was /.1 in $+'+ and is pro:ected to reach '. by $+1+.

&> E*amples of support ratios for selected countries in '<5+, $+'+, and pro:ected for $+1+9 &'

Country 1970 2010 2050 (projected)

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United States 1./ 2.1 $.>

Aapan .1 $.> '.$

%ritain 2./ /.> $.2

Bermany 2.' /.+ '.>

)rance 2.$ /.1 '.<

Cetherlands 1./ 2.+ $.'

Pension computations&edit

!ension computations are often performed by actuaries using assumptions regarding current and

future demographics, life e*pectancy, investment returns, levels of contributions or ta*ation, and

payouts to beneficiaries, among other variables. 7ne area of contention relates to the e*pected

investment return rate. 3f this rate (e*pressed as a percentage is increased, relatively lower

contributions are demanded of those paying into the system. ?ritics have argued that investment

return percentage rate assumptions are artificially inflated, to reduce the re6uired contribution

amounts by individuals and governments paying into the pension system. )or e*ample, the U.S.

stock market (ad:usted for inflation did not have a sustained increase in value between $+++ and

$+'+. Dowever, many pensions have annual investment return assumptions or estimates in the 5=

range, which are closer to the pre"$+++ average return. 3f these rates were lowered '=$

percentage points, the re6uired pension contributions taken from salaries or via ta*ation wouldincrease dramatically. %y one estimate, each ' point reduction means '+ more in contributions.

)or e*ample, if a pension program reduced its investment return rate assumption from to 5, a

person contributing -'++ per month to their pension would be re6uired to contribute -''+.

 0ttempting to sustain better"than"market returns can also cause portfolio managers to take on more

risk.&5

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The 3nternational onetary )und reported in 0pril $+'$ that developed countries may be

underestimating the impact of longevity on their public and private pension calculations. The 3)

estimated that if individuals live three years longer than e*pected, the incremental costs could

approach 1+ of $+'+ B@! in advanced economies and $1 in emerging economies. 3n the United

States, this would represent a < increase in pension obligations. The 3) recommendationsincluded raising the retirement age commensurate with life e*pectancy.&

United States&edit

U.S. Social Security program&edit

Social Security " 8atio of ?overed #orkers to 8etirees

Main article: Social Security debate (United States)

The number of U.S. workers per retiree was 1.' in '<>+; this declined to /.+ in $++< and is pro:ectedto decline to $.' by $+/+.&< The number of Social Security program recipients is e*pected to increase

from 22 million in $+'+ to 5/ million in $+/+. &'+ The present value of unfunded obligations under

Social Security as of 0ugust $+'+ was appro*imately -1.2 trillion. 3n other words, this amount would

have to be set aside today such that the principal and interest would cover the shortfall over the ne*t

51 years.&2 The Social Security 0dministration pro:ects that an increase in payroll ta*es e6uivalent to

'.< of the payroll ta* base or +.5 of B@! would be necessary to put the Social Security program

in fiscal balance for the ne*t 51 years. 7ver an infinite time horiFon, these shortfalls average /.2 of 

the payroll ta* base and '.$ of B@!.&''

U.S. State-leel issues&edit3n financial terms, the crisis represents the gap between the amount of promised benefits and the

resources set aside to pay for them. )or e*ample, many U.S. states have underfunded pensions,

meaning the state has not contributed the amount estimated to be necessary to pay future

obligations to retired workers. The !ew ?enter on the States reported in )ebruary $+'+ that states

have underfunded their pensions by nearly -' trillion as of $++, representing the gap between the

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-$./1 trillion states had set aside to pay for employees4 retirement benefits and the -/./1 trillion

price tag of those promises.&$

The ?enter on %udget and !olicy !riorities (?%!! reported in Aanuary $+'' that9

•  0s of $+'+, the state pension shortfall ranges between -5++ billion and -/ trillion, dependingon the discount rate used to value the future obligations. The -5++ billion figure is based on

using a discount rate in the range representative of historical pension fund investment

returns, while the -/ trillion represents a discount rate in the 1 range representative of

historical Treasury bond (risk"free yields.&'$

• This shortfall emerged after the year $+++, substantially due to ta* revenue declines from

two recessions.

• States contribute appro*imately /. of their operating budgets to their pension programs

on average. This would have to be raised to 1.+ to cover the -5++ billion shortfall and around

<.+ to cover the -/ trillion shortfall.

• ?ertain states (e.g., 3llinois, ?alifornia, and Cew Aersey have significantly underfunded their

pension plans and would have to raise contributions towards 5=< of their operating budgets,

even under the more aggressive discount rate assumption.

• States have significant time before the pension assets are e*hausted. Sufficient funds are

present already to pay obligations for the ne*t '1=$+ years, as many began funding their

pensions back in the '<5+s. The ?%!! estimates that states have up to /+ years to addresstheir pension shortfalls.

• States accumulated more than -/ trillion in assets between '<+ and $++5 and there is

reason to assume they can and will do that again, as the economy recovers.

• Cearly all debt issued by a state (generally via bonds is used to fund its capital budget, not

its operating budget. ?apital budgets are used for infrastructure like roads, bridges and schools.

7perating budgets pay pensions, salaries, rent, etc. So state debt levels related to bond

issuance and the funding of pension obligations have substantially remained separate issues up

to this point.

• State debt levels have ranged between '$ and ' of B@! between '<5< and $++<.

@uring the second 6uarter of $+'+, the debt level was '>.5.

• State interest e*penses remains a modest 2"1 of all stateGlocal spending.

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• !ension promises are contractually binding. 3n many states, constitutional amendments are

also re6uired to modify them. &'/

The pension replacement rate, or percentage of a worker4s pre"retirement income that the pension

replaces, varies widely from state to state. 3t bears little correlation to the percentage of state

workers who are covered by a collective bargaining agreement. )or e*ample, the replacement rate

in issouri is 11.2, while in Cew Hork it is 55.'. 3n ?olorado, replacement rates are higher but

these employees are barred from participating in Social Security.&'2

The ?ongressional %udget 7ffice reported in ay $+'' that most state and local pension plans

probably will have sufficient assets, earnings, and contributions to pay scheduled benefits for a

number of years and thus will not need to address their funding shortfalls immediately. %ut they will

probably have to do so eventually, and the longer they wait, the larger those shortfalls could

become. ost of the additional funding needed to cover pension liabilities is likely to take the form of 

higher government contributions and therefore will re6uire higher ta*es or reduced government

services for residents.&'1

U.S. city and municipality pensions&edit

3n addition to states, U.S. cities and municipalities also have pension programs. There are $$+ state

pension plans and appro*imately /,$++ locally administered plans. %y one measure, the unfunded

liabilities for these programs are as high as -152 billion. The term unfunded liability represents the

amount of money that would have to be set aside today such that interest and principal would cover

the gap between program cash inflows and outflows over a long period of time. 7n average,

pensions consume nearly $+ percent of municipal budgets. %ut if trends continue, over half of every

dollar in ta* revenue would go to pensions, and by some estimates in some instances up to 51percent.&'>&'5

 0s of early $+'/, several U.S. cities had filed for bankruptcy protection under federal laws and were

seeking to reduce their pension obligations. 3n some cases, this might contradict state laws, leading

to a set of constitutional 6uestions that might be addressed by the U.S. Supreme ?ourt.&'

S!i"t "rom de"ined #ene"it to de"ined contri#ution pensions&edit

The Social Security 0dministration reported in $++< that there is a long"term trend of pensions

switching from defined benefit (@% (i.e., a lifetime annuity typically based on years of service and

final salary to defined contribution (@? (e.g., 2+'(k plans, where the worker invests a certain

amount, often with a match from the employer, and can access the money upon retirement or under

special conditions. The report concluded that9 7n balance, there would be more losers than

winners and average family incomes would decline. The decline in family income is e*pected to be

much larger for last"wave boomers born from '<>' to '<>1 than for first"wave boomers born from

'<2> to '<1+, because last"wave boomers are more likely to have their @% pensions froFen with

relatively little :ob tenure. &'<

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The percentage of workers covered by a traditional defined benefit (@% pension plan declined

steadily from / in '<+ to $+ in $++. 3n contrast, the percentage of workers covered by a

defined contribution (@? pension plan has been increasing over time. )rom '<+ through $++, the

proportion of private wage and salary workers participating in only @? pension plans increased from

to /'. ost of the shift has been the private sector, which few changes in the public sector.Some e*perts e*pect that most private"sector plans will be froFen in the ne*t few years and

eventually terminated. Under the typical @% plan freeFe, current participants will receive retirement

benefits based on their accruals up to the date of the freeFe, but will not accumulate any additional

benefits; new employees will not be covered. 3nstead, employers will either establish new @? plans

or increase contributions to e*isting @? plans. &'<

Employees in unions are more likely to be covered by a defined benefit plan, with >5 of union

workers covered by such a plan during $+'' versus '/ of non"union workers.&$+

Economist !aul Irugman wrote in Covember $+'/9 Today, however, workers who have any

retirement plan at all generally have defined"contribution plansJbasically, 2+'(k4sJin which

employers put money into a ta*"sheltered account that4s supposed to end up big enough to retire on.

The trouble is that at this point it4s clear that the shift to 2+'(k4s was a gigantic failure. Employers

took advantage of the switch to surreptitiously cut benefits; investment returns have been far lower

than workers were told to e*pect; and, to be fair, many people haven4t managed their money wisely.

 0s a result, we4re looking at a looming retirement crisis, with tens of millions of 0mericans facing a

sharp decline in living standards at the end of their working lives. )or many, the only thing protecting

them from ab:ect penury will be Social Security.&$'&$$

 0 $+'2 Ballup poll indicated that $' of investors had either taken an early withdrawal of their

2+'(k defined contribution retirement plan or a loan against it over the previous five years. &$/ )idelity

3nvestments reported in )ebruary $+'2 that9

• The average 2+'(k balance reached a record -<,/++ in the fourth 6uarter of $+'/, a '1.1

increase over $+'$ and almost double the low of -2>,$++ set in $++< (which was affected by

the Breat 8ecession.

• The average balance for persons 11 and older was -'>1,$++.

•  0ppro*imately one"third (/1 of all 2+'(k participants cashed out their accounts when they

left their :obs in $+'/, which can cost investors in terms of penalties and ta*es.&$2

Solutions&edit

8eform ideas are in three primary categories9 a 0ddressing the worker"retiree ratio, via raising the

retirement age, employment policy, and immigration policy; b 8educing obligations via shifting from

defined benefit to defined contribution pension types and reducing future payment amounts; and c

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3ncreasing resources to fund pensions via increasing contribution rates and raising ta*es. 8ecently

the latter has included proposals for and actual confiscation of private pension plans and merging

them into government run plans. &$1

!roposed solutions to the pensions crisis include ones that address the dependency ratio = later

retirement, part"time work by the aged, encouraging higher birth rates, or immigration of working

aged persons = and ones that take the dependency ratio as given and address the finances =

higher ta*es, reductions in benefits, or the encouragement or reform of private saving.

3n the United States, since '<5< there has been a significant shift away from defined benefit plans

with a corresponding increase in defined contribution plans, like the 2+'(k. 3n '<5<, >$ of private

sector employees with pension plans of some type were covered by defined benefit plans, with

about '5 covered by defined contribution plans. %y $++<, these had reversed to appro*imately 5

and >, respectively. 0s of $+'', governments were beginning to follow the private sector in this

regard.&$>

8esearch indicates that employees save more if they are automatically enrolled in savings plans

(i.e., enrolled and given an option to drop out, as opposed to being re6uired to take action to opt into

the plan. Some countries have laws that re6uire employers to opt employees into defined

contribution plans.&$>

Criticisms&edit

$t!er sources o" income&edit

Some claim&who? that the pensions crisis does not e*ist or is overstated, as pensioners in developed

countries faced with population aging are often able to unlock considerablehousing wealth and makereturns from other  investments or  employment.

%emograp!ic transition&edit

&citation needed &dead link  3nverse dependency ratio (workers per dependent by world regions, '<1+=$+1+, notably showing

demographic windows in the US and East 0sia.

Some argue ()038 $+++ that the crisis is overstated, and for many regions there is no crisis,

because the total  dependency ratio = composed of aged and youth = is simply returning to long"term

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norms, but with more aged and fewer youth9 looking only at aged dependency ratio is only one half

of the coin. The dependency ratio is not increasing significantly, but rather its composition is

changing.

3n more detail9 as a result of the demographic transition from short"lived, high birth"rate society to

long"lived, low birth"rate society, there is a demographic window when an unusually high portion of

the population is working age, because first death rate decreases, which increases the working age

population, then birth rate decreases, reducing the youth dependency ratio, and only then does the

aged population grow. The decreased death rate having little effect initially on the population of the

aged (say, >+K because there are relatively few near"aged (say, 1+=>+ who benefit from the fall in

death rate, and significantly more near"working age (say, '+=$+ who do. 7nce the aged population

grows, the dependency ratio returns to appro*imately the same level it was prior to the transition.

Thus, by this argument, there is no pensions crisis, :ust the end of a temporary golden age, and

added costs in pensions are recovered by savings in paying for youth.

Dowever, if a country4s fertility rate falls too far below replacement level, in future there will be

unusually few workers supporting the still large retiree population, and the dependency ratio will rise

above historical levels, possibly causing an actual crisis.&citation needed 

 0 complicating factor is that support for the youth and support for the aged may be provided by

different agents, funded in different ways, making the hand off difficult. )or e*ample in the United

States, care for the youth is provided by parents, with the primary government e*pense being

education, which is primarily provided by local and state governments, paid for by property ta*es (a

form of  wealth ta*, while care for the aged is commonly provided by hospitals and nursing homes,

and the e*penses are pensions and health care, which are provided by the federal government, paidfor by payroll ta*es (a form of income ta*. Thus, local property ta*es and the unta*ed labor of

parents cannot be directly handed off to fund pensions and health care, creating a coordination

problem.&citation needed 

&isual e'planation&edit

!opulation pyramids; dependency ratio is appro*imately e6ual in Stage ' and Stage /, but composition differs =

youth in Stage ', aged in Stage /

Lisually, in a classic population pyramid (Stage ' and $, the base (youth is wide, and the peak

(aged is short and narrow. 0s the population ages, it passes through the demographic window (not

pictured where the pyramid is almost vertical from youth through working age, then tapers in the

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aged. 7nce the population has passed through the window and stabiliFed (Stage /, youth is less

significant (because much slower taper, so a smaller fraction, but aged are more significant

(because taller and wider = however, the overall dependency ratio is roughly the same in both

cases.&$5

3f, however, the birthrate falls below replacement level, then the bottom shrinks, and as this baby

bust works up the pyramid, a narrower base of workers supports a still"large peak of aged, and the

dependency ratio does increase; this is particularly the case if there is a sharp (sudden, significant

drop in fertility rate.

Key terms&edit

• Support ratio9 The number of people of working age compared with the number of people

beyond retirement age

• !articipation rate9 The proportion of the population that is in the labor force

• @efined benefit9 0 pension linked to the employee4s salary, where the risk falls on the

employer to pay a contractual amount

• @efined contribution9 0 pension dependent on the amount contributed and related investment

performance, where the risk falls mainly on the employee&'

Pensions crisis: Millions are saving

too little to avoid poverty in old age%83T03C faces a pensions timebomb after it emerged almost half the workforce is saving

nothing for retirement.

By GILES SHELDRICK 

PUBLISHED: 00:01, Mon, Sep 14, 2015

BETTH

illions of %rits are facing a pension crisis when they get older 

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The poor state of personal finances is laid bare in figures showing a generation sleepwalking

towards an impoverished old age.

Matest research shows the average worker saves N'.5$ a day, less than the cost of a cup of coffee.

Het 21 per cent of working adults = '/.1 million people = refuse to put any money at all to one side.

#orryingly, this figure is higher, at 2< per cent, among ' to /2"year"olds.

The crisis is blamed on a destructive Olive for todayP mentality.

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Longer life expectancy could prove expensive

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Scrap age limits on mortgage lending, say pensioners anting to!!!

E*perts warned last night that the pension system faced meltdown unless drastic action was taken.

3t comes as a third of savers have given up the prospect of retiring for more than five years with '>

per cent resigned to working until they drop.

t s!ouldnt #e le"t until t!e end o" t!e mont! to see *!ats le"t+ a direct de#its!ould come out at t!e start o" eac! mont!

Steve ?arlson, of ?arlson #ealth anagement Mtd

@avid Darrison, managing partner of financial services firm True !otential which carried out the

research, said9 O#e live in an impulse debt culture but we need to impulse save instead.

OThe fact that many people choose to spend on coffee rather than their retirement funds points to a

culture of complacency.P

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The independent consumer survey found :ust N1' is invested in retirement funds each month on

average.

The study of $,+++ people revealed those aged between $1 and /2 were the most complacent,

blowing N51.<+ a month on impulse purchases.

The average worker built up N',$5$ of debt in the past three months, with 1> per cent saying it was

easier to get credit now than it was '+ years ago.

The BovernmentQs automatic enrolment scheme started in $+'$ with the aim of helping people save

to top up the paltry state pension.

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C"inese #uyers look to put cas" in London$s $safe "aven$ property 

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Benefit fraudsters living a#road cost Britain %&' M(LL()* + some!!!

%ut >5 per cent of those 6uiFFed in the audit were not yet enrolled.

Steve ?arlson, managing director of ?arlson #ealth anagement Mtd, said saving for retirement

should be viewed as essential.

De said9 O3t shouldnQt be left until the end of the month to see whatQs left, a direct debit should come

out at the start of each month.P

!ensions minister %aroness 0ltmann said9 O3 am concerned to ensure more people understand the

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value of saving for later. #hile the state pension system can provide a safety net, most people

wanting to maintain their living standards into old age will need a private provision.

 The pension nih!"#$e !h#! is #! !he he#$! o% the horrifc fnancial crisis in Detroit is &'s!!he !ip o% !he i(e)e$ o% !he (o"in $e!i$e"en! ($isis !h#! *i++ sh#e -"e$i(# !o !he (o$e.Rih! no*, more than 10,000 Baby Boomers #$e hi!!in !he #e o% /5 ee$y sin+e #y,#n !his *i++ (on!in'e !o h#ppen ee$y sin+e #y 'n!i+ !he ye#$ 200. -s # so(ie!y, *e h#e"#e !$i++ions o% o++#$s o% 3n#n(i#+ p$o"ises !o !hese B#)y Boo"e$s, #n !he$e is no *#y!h#! *e #$e oin !o )e #)+e !o eep !hose p$o"ises. The "oney si"p+y is no! !he$e. es, Is'ppose !h#! *e (o'+ een!'#++y see # s'pe$ e#+'#!ion6 o% !he U.S. o++#$ #n eep o'$p$o"ises !o !he B#)y Boo"e$s 'sin ('$$en(y !h#! is no! *o$!h "'(h "o$e !h#n Monopo+y"oney, )'! #s i! s!#ns $ih! no* *e si"p+y o no! h#e !he $eso'$(es !o o *h#! *e s#i!h#! *e *e$e oin !o o. The n'")e$ o% senio$ (i!i7ens in !he Uni!e S!#!es is p$o&e(!e !o"o$e !h#n o')+e )y !he "i+e o% !he (en!'$y, #n i! *o'+ h#e )een ne#$+y i"possi)+e !os'ppo$! !he" #++ een i% *e *e$en8! in the midst o a long-term economic decline. Tenso% "i++ions o% -"e$i(#ns !h#! #$e e#e$+y +ooin %o$*#$ !o $e!i$e"en! #$e oin !o )e in %o$# e$y $'e #*#enin in !he ye#$s #he#. The$e is oin !o )e # +o! o% he#$!#(he #n # +o!o% )$oen p$o"ises.

9h#! is oin on in De!$oi! $ih! no* is # pe$%e(! e#"p+e o% *h#! *i++ soon )e h#ppenin #++oe$ !he n#!ion. M#ny (i!y *o$e$s s!'( *i!h !hei$ &o)s %o$ e(#es )e(#'se o% !he p$o"iseo% # ni(e pension #! !he en o% !he $#in)o*. B'! no* !hose p$o"ises #$e oin 'p in s"oe. The$e h#s een )een !#+ !h#! $e!i$ees *i++ on+y en 'p e!!in #)o'! 10 (en!s %o$ ee$yo++#$ !h#! !hey *e$e p$o"ise.

;ee+ess !o s#y, "#ny pensione$s #$e e!$e"e+y #n$y !h#! !he p$o"ises !h#! *e$e "#e !o!he" #$e no! oin !o )e ep!. The %o++o*in is %$o" # $e(en! #$!i(+e in the New YorkTimes<

M#ny $e!i$ees see !he p+#n !o ('! !hei$ pensions #s # )e!$#y#+, s#yin !h#! !hey ep! !hei$en o% # e#+ )'! !h#! !he (i!y is no* $enein. Re!i$e (i!y *o$e$s, po+i(e o=(e$s #n >11ope$#!o$s s#i in in!e$ie*s !h#! !he p$o"ise o% $e+i#)+e $e!i$e"en! in(o"e h# he+pe $#*

!he" !o *o$ %o$ !he Ci!y o% De!$oi! in !he 3$s! p+#(e, een i% !hey so"e!i"es h# !o #((ep!s"#++e$ s#+#$ies o$ *o$ nih!s o$ *eeens.

Does De!$oi! h#e # p$o)+e"?6 #se 9i++i#" Shine, @/, # $e!i$e po+i(e se$e#n!.-)so+'!e+y. Di I ($e#!e i!? I on8! !hin so. They "#e "e so"e p$o"ises, #n I "#e !he"so"e p$o"ises. I ep! "y p$o"ises. They8$e no! oin !o eep !hei$s.6

B'! De!$oi! is %#$ %$o" #n iso+#!e (#se. -s Detroit Mayor Dae Bing s#i !he o!he$ #y,"#ny o!he$ (i!ies #$e he#in o*n !he e#(! s#"e p#!h<

9e "#y )e one o% !he 3$s!. 9e #$e !he +#$es!. B'! *e #)so+'!e+y *i++ no! )e !he +#s!.6

 es, De!$oi!8s 3n#n(i#+ p$o)+e"s #$e i""ense. B'! o!he$ "#&o$ U.S. (i!ies #$e %#(in

'n%'ne pension +i#)i+i!ies !h#! #$e een *o$se.

Ao$ e#"p+e, he$e #$e !he 'n%'ne pension +i#)i+i!ies %o$ o!r fnancially-tro!bled large"#$# cities<

De!$oi!: .5 )i++ion

B#+!i"o$e: /0 "i++ion

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Los -ne+es: >.4 )i++ion

Chi(#o: 1> )i++ion

9hen yo' )$e# i! o*n on # pe$ (i!i7en )#sis, De!$oi! is #(!'#++y in )e!!e$ sh#pe !h#n !heo!he$s<

De!$oi!: @,145

B#+!i"o$e: @,24@

Los -ne+es: ,4@

Chi(#o: 1,55

-n "#ny s!#!e oe$n"en!s #$e in si"i+#$ sh#pe. Rih! no*, !he s!#!e o% I++inois h#s'n%'ne pension +i#)i+i!ies !h#! !o!#+ #pp$oi"#!e+y %100 billion.

 The$e #$e so"e 3n#n(i#+ &o'$n#+is!s6 o'! !he$e !h#! #$e #!!e"p!in !o o*np+#y !his

p$o)+e", )'! s!i(in o'$ he#s in !he s#n is no! oin !o "#e #ny o% !his o #*#y.

-((o$in !o ;o$!h*es!e$n Unie$si!y P$o%esso$ ohn R#'h, !he !o!#+ #"o'n!o% !n!nded pension #n he#+!h(#$e o)+i#!ions %o$ $e!i$ees !h#! s!#!e #n +o(#+oe$n"en!s #($oss !he Uni!e S!#!es h#e #(('"'+#!e is &#& trillion dollars.

So *he$e #$e !hey oin !o e! !h#! "oney?

 They #$e oin !o $#ise yo'$ !#es o% (o'$se.

 's! (he( o'! *h#! is h#ppenin $ih! no* in $cranton, 'ennsylania<

S($#n!on !#p#ye$s (o'+ %#(e # 11@ pe$(en! in($e#se in !#es ne! ye#$ #s !he (i!y8s

3n#n(es (on!in'e !o spi$#+ o'! o% (on!$o+.

- ne* #n#+ysis )y !he Pennsy+#ni# E(ono"y Le#'e p$o&e(!s #n 1 "i++ion e3(i! %o$ 2014,#n #"o'n! so "#ssie i! o'!p#(es !he #pp$oi"#!e 1@ "i++ion !he s!$'+in (i!y (o++e(!s#nn'#++y

- 11@ pe$(en! !# in($e#se?

9h#! *o'+ D*ih! S(h$'!e !hin o% !h#!?

Pe$h#ps yo' #$e $e#in !his #n yo' #$e #ss'"in !h#! yo'$ $e!i$e"en! is se('$e )e(#'seyo' *o$ in !he p$i#!e se(!o$.

9e++, &'s! $e"e")e$ *h#! h#ppene !o yo'$ 401 '$in !he 3n#n(i#+ ($isis o% 200. D'$in!he ne! "#&o$ s!o( "#$e! ($#sh, yo'$ 401 *i++ +ie+y e! #)so+'!e+y sh$ee. M#ny-"e$i(#ns *i++ p$o)#)+y see !he #+'e o% !hei$ 401 #((o'n!s o o*n )y 50 pe$(en! o$"o$e.

-n i% yo' h#e s!#she yo'$ $e!i$e"en! %'ns *i!h !he *$on 3$", yo' (o'+ en 'p+osin eerything. 's! #s #nyone !h#! h# !hei$ nes! es ines!e *i!h M( )lobal.

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B'! o% (o'$se "os! -"e$i(#ns #$e *oe%'++y )ehin on s#in %o$ $e!i$e"en! #ny*#y. - s!'y(on'(!e )y Bos!on Co++ee8s Cen!e$ %o$ Re!i$e"en! Rese#$(h %o'n !h#! -"e$i(#n*o$e$s are %*#* trillion short o% *h#! !hey nee !o $e!i$e (o"%o$!#)+y.

 Th#! (e$!#in+y isn8! oo ne*s.

n !op o% ee$y!hin e+se, !he %ee$#+ oe$n"en! h#s )een $e(+ess+y i$$esponsi)+e #s %#$ #sp+#nnin %o$ !he $e!i$e"en! o% !he B#)y Boo"e$s is (on(e$ne.

-s I no!e yesterday, !he U.S. oe$n"en! is %#(in # !o!#+ o% +++ trillion dollars in'n%'ne +i#)i+i!ies. So(i#+ Se('$i!y #n Mei(#$e "#e 'p !he )'+ o% !h#!.

-! !his poin!, !he n'")e$ o% -"e$i(#ns on Mei(#$e is p$o&e(!e !o $o* %$o" # +i!!+e )i! "o$e!h#n 50 "i++ion !o#y !o #+ million in 2025.

 The n'")e$ o% -"e$i(#ns (o++e(!in So(i#+ Se('$i!y )ene3!s is p$o&e(!e !o $o* %$o" #)o'!5/ "i++ion !o#y !o .1 million in 205.

Ho* is # so(ie!y *i!h # s!e#i+y e(+inin e(ono"y oin !o (#$e %o$ !he" #++ #eF'#!e+y?

 es, *e !$'+y #$e (#$eenin !o*#$ is#s!e$.

I% yo' #$e no! (onin(e ye!, he$e #$e so"e "o$e n'")e$s. The %o++o*in s!#!s #$e %$o" oneo% "y p$eio's #$!i(+es en!i!+e Do Yo! /ant To $care Baby Boomer<

1# Rih! no*, !he$e #$e so"e*he$e #$o'n 40 "i++ion senio$ (i!i7ens in !he Uni!e S!#!es.By 2050 !h#! n'")e$ is p$o&e(!e !o sy$o(e! !o 2. million.

+# -((o$in !o one $e(en! po++, +3 4ercent o% #++ -"e$i(#ns in !he 4/ !o /4ye#$o+ #e)$#(e! h#e no $e!i$e"en! s#ins #! #++.

# +* 4ercent o% #++ -"e$i(#ns in !he 4/ !o /4ye#$o+ #e )$#(e! h#e no pe$son#+

s#ins *h#!soee$.

&# ne s'$ey !h#! (oe$e #++ -"e$i(#n *o$e$s %o'n !h#! &* 4ercent o% !he" h#e +ess!h#n 10,000 s#e %o$ $e!i$e"en!.

3# -((o$in !o # s'$ey (on'(!e by the 5m4loyee Beneft 6esearch 7nstit!te, /0pe$(en! o% -"e$i(#n *o$e$s s#i !he !o!#+ #+'e o% !hei$ s#ins #n ines!"en!s is +ess!h#n 25,000.

*# - Pe* Rese#$(h s'$ey %o'n !h#! hal o all Baby Boomers s#y !h#! !hei$ ho'seho+3n#n(i#+ si!'#!ions h#e e!e$io$#!e oe$ !he p#s! ye#$.

# * 4ercent o% #++ -"e$i(#n *o$e$s )e+iee !h#! !hey #$e # +i!!+e o$ # +o! )ehin s(he'+e

on s#in %o$ $e!i$e"en!6.

2# To#y, one o!t o eery si8 e+e$+y -"e$i(#ns +ies )e+o* !he %ee$#+ poe$!y +ine.

.# Mo$e e+e$+y -"e$i(#ns !h#n ee$ #$e 3nin !h#! !hey "'s! (on!in'e *o$in on(e !hey$e#(h !hei$ $e!i$e"en! ye#$s. Be!*een 1>5 #n 2010, !he pe$(en!#e o% -"e$i(#ns in !he/5 !o />ye#$o+ #e )$#(e! !h#! *e$e s!i++ *o$in in($e#serom 12 4ercent to +4ercent.

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10# B#( in 1>>1, h#+% o% #++ -"e$i(#n *o$e$s p+#nne !o $e!i$e )e%o$e !hey $e#(he !he #eo% /5. To#y, !h#! n'")e$ h#s e(+ine !o + 4ercent.

11# -((o$in !o one $e(en! s'$ey, 0 4ercent o% #++ -"e$i(#n *o$e$s epe(! !o (on!in'e*o$in on(e !hey #$e $e!i$e6.

1+# -((o$in !o # po++ (on'(!e )y --RP, &0 4ercent o% #++ B#)y Boo"e$s p+#n !o *o$'n!i+ !hey $op6.

1# - po++ (on'(!e )y CESI De)! So+'!ions %o'n !h#! 3* 4ercent o% -"e$i(#n $e!i$ees s!i++h# o'!s!#nin e)!s *hen !hey $e!i$e.

1&# E+e$+y -"e$i(#ns !en !o (#$$y "'(h hihe$ )#+#n(es on !hei$ ($ei! (#$s !h#n yo'ne$-"e$i(#ns o. The %o++o*in is %$o" # $e(en! 9NB9 article<

;e* $ese#$(h %$o" !he --RP #+so sho*s !h#! !hose #es 50 #n oe$ #$e (#$$yin hihe$)#+#n(es on !hei$ ($ei! (#$s ,2@ in 2012 (o"p#$e !o /,25 %o$ !he 'ne$50pop'+#!ion.

13# - s!'y )y # +#* p$o%esso$ #! !he Unie$si!y o% Mi(hi#n %o'n !h#! -"e$i(#ns !h#! #$e55 ye#$s o% #e o$ o+e$ no* #((o'n! %o$ +0 4ercent o% #++ )#n$'p!(ies in !he Uni!eS!#!es. B#( in 2001, !hey on+y #((o'n!e %o$ 12 pe$(en! o% #++ )#n$'p!(ies.

1*# Be!*een 1>>1 #n 200@ !he n'")e$ o% -"e$i(#ns )e!*een !he #es o% /5 #n @4 !h#!3+e %o$ )#n$'p!(y $ose )y # s!#e$in 12 4ercent.

1# 9h#! is (#'sin "os! o% !hese )#n$'p!(ies #"on !he e+e$+y? The n'")e$ one (#'seis "ei(#+ )i++s. -((o$in !o # $epo$! p')+ishe in The -"e$i(#n o'$n#+ o% Mei(ine,"ei(#+ )i++s #$e # "#&o$ %#(!o$ in more than *0 4ercent o% !he pe$son#+ )#n$'p!(ies in!he Uni!e S!#!es. % !hose )#n$'p!(ies !h#! *e$e (#'se )y "ei(#+ )i++s, #pp$oi"#!e+y@5 pe$(en! o% !he" ino+e inii'#+s !h#! #(!'#++y i h#e he#+!h ins'$#n(e.

12# In 1>45, !he$e *e$e &+ workers %o$ ee$y $e!i$ee $e(eiin So(i#+ Se('$i!y )ene3!s. To#y, !h#! n'")e$ h#s %#++en !o +#3 workers, #n i% yo' e+i"in#!e #++ oe$n"en! *o$e$s,!h#! +e#es on+y 1./ p$i#!e se(!o$ *o$e$s %o$ ee$y $e!i$ee $e(eiin So(i#+ Se('$i!y)ene3!s.

1.# Mi++ions o% e+e$+y -"e$i(#ns !hese #ys #$e 3nin i! e$y i=('+! !o s'$ie on &'s! #So(i#+ Se('$i!y (he(. The !$'!h is !h#! "os! So(i#+ Se('$i!y (he(s si"p+y #$e no! !h#!+#$e. The %o++o*in (o"es i$e(!+y %$o" the $ocial $ec!rity dministration website<

 The #e$#e "on!h+y So(i#+ Se('$i!y )ene3! %o$ # $e!i$e *o$e$ *#s #)o'! 1,20 #! !he)einnin o% 2012. This #"o'n! (h#nes "on!h+y )#se 'pon !he !o!#+ #"o'n! o% #++)ene3!s p#i #n !he !o!#+ n'")e$ o% peop+e $e(eiin )ene3!s.

 o' (#n ie* !he $es! o% !he s!#!is!i(s right here.

S#+y, "os! -"e$i(#ns #$e no! #*#$e o% !hese !hins.

 The "#ins!$e#" "ei# eeps "os! o% !he pop'+#!ion en!e$!#ine *i!h is!$#(!ions. This*ee i! is the birth o the royal baby, #n ne! *ee i! *i++ )e so"e!hin e+se.

Me#n*hi+e, o'$ p$o)+e"s &'s! (on!in'e !o e! *o$se #n *o$se.

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 The$e is no *#y in !he *o$+ !h#! *e #$e oin !o )e #)+e !o eep #++ o% !he 3n#n(i#+p$o"ises !h#! *e h#e "#e !o !he B#)y Boo"e$s. - +o! o% !he" #$e oin !o en 'p)i!!e$+y is#ppoin!e.

-++ o% !his (o'+ h#e )een #oie i% *e *o'+ h#e p+#nne #he# #s # so(ie!y.

B'! !h#! i no! h#ppen, #n no* *e #$e #++ oin !o p#y !he p$i(e %o$ i!.

 T#s: -"e$i(#, B#)y Boo"e$s, E(ono"i( De(+ine, Ain#n(i#+, Ain#n(i#+ C$isis,Ain#n(i#+

P$o"ises, Looin Ao*#$ To Re!i$e"en!, Mi(h#e+ T. Snye$, Pension,Pension C$isis, Pension

;ih!"#$e, Re!i$e"en!, Re!i$e"en! C$isis, Senio$ Ci!i7ensJ C#!eo$y: E(ono"i( Desp#i$ J 0

Co""en!s  :;

++ $tatistics bo!t merica<s 9oming'ension 9risis That /ill Make Yo! =ose$lee4 t Night

-s !he 3$s! o% !he 0 "i++ion B#)y Boo"e$s h#e)e'n !o $e!i$e, i! h#s )e(o"e in($e#sin+y #pp#$en! !h#! !he Uni!e S!#!es is %#(in #pension ($isis o% 'np$e(een!e "#ni!'e. S!#!e #n +o(#+ oe$n"en! pension p+#ns #$e*oe%'++y 'ne$%'ne, o7ens o% +#$e (o$po$#!e pension p+#ns ei!he$ h#e (o++#pse o$ #$eon !he e$e o% (o++#psin, So(i#+ Se('$i!y is # (o"p+e!e #n !o!#+ 3n#n(i#+ is#s!e$ #n#)o'! h#+% o% #++ -"e$i(#ns essen!i#++y h#e no!hin s#e 'p %o$ $e!i$e"en!. So yes, !o s#y!h#! *e #$e %#(in # $e!i$e"en! ($isis *o'+ )e # !$e"eno's 'ne$s!#!e"en!. The$e is

si"p+y no *#y !h#! *e (#n eep #++ o% !he 3n#n(i#+ p$o"ises !h#! *e h#e "#e !o !he B#)yBoo"e$ ene$#!ion. Un%o$!'n#!e+y, !he ($'")+in U.S. e(ono"y si"p+y (#nno! s'ppo$! !he(o"%o$!#)+e $e!i$e"en! o% !ens o% "i++ions o% e+e$+y -"e$i(#ns #ny +one$. The !$'!h is !h#!*e #$e #++ oin !o h#e !o s!#$! %'n#"en!#++y (h#nin !he *#y !h#! *e !hin #)o'! o'$o+en ye#$s.

n(e 'pon # !i"e, yo' (o'+ (o'n! on e!!in # )i, %#! pension i% yo' p'! 0 ye#$s in!o # &o). B'! no* pension p+#ns ee$y*he$e #$e %#i+in. S!#!e #n +o(#+ oe$n"en!s #$e ('!!in

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)#( #n #$e $#isin $e!i$e"en! #es. - "#&o$i!y o% -"e$i(#ns h#e een +os! %#i!h in !heSo(i#+ Se('$i!y sys!e", *hi(h *#s s'ppose !o )e !he "os! se('$e o% !he" #++.

 The $e#+i!y is !h#! *e #$e "oin in!o # !i"e *hen !he$e is no! oin !o )e s'(h # !hin #s3n#n(i#+ se('$i!y6 #s *e h#e no*n i! in !he p#s!. Thins h#e %'n#"en!#++y (h#ne,#n *e #$e #++ oin !o h#e !o s!$'+e !o s!#y #)oe *#!e$ in !he e(ono"i( nih!"#$e !h#!

is (o"in.

P#$! o% !he $e#son *e h#e s'(h # i#n!i( e(ono"i( "ess on !he *#y is )e(#'se *e h#ep$o"ise #s!+y "o$e !h#n *e (#n e+ie$ !o %'!'$e $e!i$ees. 9hen yo' (+ose+y e#"ine !hen'")e$s, i! F'i(+y )e(o"es (+e#$ !h#! # 3n#n(i#+ !s'n#"i is #)o'! !o hi! 's !h#! is oin !o)e so e#s!#!in !h#! i! *i++ (h#ne ee$y!hin !h#! *e no* #)o'! $e!i$e"en!.

 The %o++o*in #$e 22 s!#!is!i(s #)o'! -"e$i(#8s (o"in pension ($isis !h#! *i++ "#e yo' +oses+eep #! nih!<.

'riate 'ension 'lans nd 6etirement (!nds

1 ne $e(en! s!'y %o'n !h#! -"e$i(#8s 100 +#$es! (o$po$#!e pension p+#ns *e$e

'ne$%'ne by %+1 billion #! !he en o% 200.

+  -pp$oi"#!e+y h#+% o% #++ *o$e$s in !he Uni!e S!#!es hae less than %+000s#e 'p%o$ $e!i$e"en!.

  -((o$in !o one $e(en! s'$ey, / pe$(en! o% -"e$i(#ns s#y that they don<tcontrib!te anything at all !o $e!i$e"en! s#ins.

&  The Pension Bene3! G'#$#n!y Co$po$#!ion s#ys !h#! !he n'")e$ o% pensions #! $isinsie %#i+in (o"p#nies more than tri4led '$in !he $e(ession.

3  -((o$in !o #no!he$ $e(en! s'$ey, 24 o% U.S. *o$e$s #"i! that they hae4ost4oned their 4lanned retirement age #! +e#s! on(e '$in !he p#s! ye#$.

$tate nd =ocal )oernment 'ensions

* Pension (ons'+!#n! Gi$#$ Mi++e$ $e(en!+y !o+ C#+i%o$ni#8s Li!!+e Hooe$ Co""ission !h#!s!#!e #n +o(#+ oe$n"en! )oies in !he s!#!e o% C#+i%o$ni# h#e%+3 billion in (o")ine'n%'ne pension +i#)i+i!ies. 9hen yo' )$e# !h#! o*n, i! (o"es !o 22,000 %o$ ee$ysin+e *o$in #'+! in C#+i%o$ni#.

  -((o$in !o # $e(en! $epo$! %$o" S!#n%o$ Unie$si!y, C#+i%o$ni#8s !h$ee )ies! pension%'ns #$e #s "'(h #s %300 billion short o% "ee!in %'!'$e $e!i$ee )ene3! o)+i#!ions.

2  In ;e* e$sey, !he oe$no$ h#s p$opose no! "#in !he s!#!e8s entire % billioncontrib!tion !o i!s pension %'ns )e(#'se o% !he s!#!e8s 11 )i++ion )'e! e3(i!.

.  I! h#s )een $epo$!e !h#! !he .@ )i++ion I++inois Te#(he$s Re!i$e"en! Sys!e" is *1>!nder!nded #n is on !he e$e o% !o!#+ (o++#pse.

10  The s!#!e o% I++inois $e(en!+y raised its retirement age to * #n (#ppe !he s#+#$yon *hi(h p')+i( pensions #$e 3'$e.

11  The s!#!e o% i$ini# is $eF'i$in e"p+oyees !o p#y in!o !he s!#!e pension %'nor thefrst time eer.

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1+  In ;e* o$ Ci!y, #nn'#+ pension (on!$i)'!ions hae increased si8old in the4ast decade alone #n #$e no* so +#$e !h#! !hey *o'+ )e #)+e !o 3n#n(e en!i$e ne*po+i(e #n 3$e ep#$!"en!s.

1 Ro)e$! ;oyM#$ o% !he Unie$si!y o% Chi(#o #n osh'# D. R#'h o% ;o$!h*es!e$n8sKe++o S(hoo+ o% M#n#e"en! $e(en!+y (#+('+#!e !he (o")ine pension +i#)i+i!y %o$ #++ 50

U.S. s!#!es. 9h#! !hey %o'n *#s !h#! !he 50 s!#!es #$e (o++e(!ie+y %#(in 5.1@ !$i++ion inpension o)+i#!ions, )'! !hey on+y h#e 1.>4 !$i++ion se! #sie in s!#!e pension %'ns. Th#!is # iNe$en(e o% #+ trillion dollars.

$ocial $ec!rity

1&  -((o$in !o one $e(en!+y (on'(!e po++, / o'! o% ee$y 10 non$e!i$ees in !he Uni!eS!#!es )e+iee !h#! !he So(i#+ Se('$i!y sys!e" will not be able to 4ay thembenefts *hen !hey s!op *o$in.

13  - e$y +#$e pe$(en!#e o% !he %ee$#+ )'e! is "#e 'p o% en!i!+e"en! p$o$#"s s'(h#s So(i#+ Se('$i!y #n Mei(#$e !h#! (#nno! )e $e'(e *i!ho'! # (h#ne in !he+#*. 44ro8imately 3 4ercent o% B#$#( )#"#8s . !$i++ion o++#$ )'e! %o$ 2011

(onsis!s o% i$e(! p#y"en!s !o inii'#+ -"e$i(#ns o$ is "oney !h#! is spen! on !hei$ )eh#+%.

1*  3> o mericans oe$ !he #e o% /5 $e+y #+"os! en!i$e+y on So(i#+ Se('$i!y p#y"en!s#+one.

1  -((o$in !o !he Con$ession#+ B'e! =(e, !he So(i#+ Se('$i!y sys!e" will 4ay o!tmore in benefts than it receies in 4ayroll ta8es in 2010. Th#! *#s no! s'ppose !oh#ppen 'n!i+ #! +e#s! 201/. The So(i#+ Se('$i!y e3(i!s #$e p$o&e(!e !o e! in($e#sin+y*o$se in !he ye#$s #he#.

12  5/ pe$(en! o% ('$$en! $e!i$ees )e+iee !h#! !he U.S. oe$n"en! will eent!ally c!ttheir $ocial $ec!rity benefts.

1.  In 1>50, e#(h $e!i$ee8s So(i#+ Se('$i!y )ene3! *#s p#i %o$ )y 1/ U.S. *o$e$s. In2010, e#(h $e!i$ee8s So(i#+ Se('$i!y )ene3! is p#i %o$ )y #pp$oi"#!e+y . U.S. *o$e$s.By 2025, i! is p$o&e(!e that there will be a44ro8imately two "#$# workers %o$ e#(h$e!i$ee.

+0  The sho$!%#++ in en!i!+e"en! p$o$#"s in !he ye#$s #he# is "in )+o*in. The p$esen!#+'e o% p$o&e(!e s(he'+e )ene3!s s'$p#sses e#$"#$e $een'es %o$ en!i!+e"en!p$o$#"s s'(h #s So(i#+ Se('$i!y #n Mei(#$e by abo!t &* trillion dollars oe$ !he ne!@5 ye#$s.

+1  ccording to a recent "#$# goernment re4ort, so#$in in!e$es! (os!s on !he U.S.n#!ion#+ e)! p+'s $#pi+y es(#+#!in spenin on en!i!+e"en! p$o$#"s s'(h #s So(i#+Se('$i!y #n Mei(#$e *i++ #)so$) #pp$oi"#!e+y >2 (en!s o% ee$y sin+e o++#$ o% %ee$#+

$een'e )y !he ye#$ 201>. Th#! is )e%o$e # sin+e o++#$ is spen! on #ny!hin e+se.

++  Rih! no*, in!e$es! on !he U.S. n#!ion#+ e)! #n spenin on en!i!+e"en! p$o$#"s +ieSo(i#+ Se('$i!y #n Mei(#$e is so"e*he$e in !he neih)o$hoo o% 15 pe$(en! o% GDP. By200, !hose (o")ine epeni!'$es #$e p$o&e(!e !o e#! 'p a44ro8imately 30 4ercent o)D'.

The !ension Section ?ouncil also took the opportunity to do some reflection at a recent meeting. The council

conducted a S#7T analysis of the !ension Section. )or those of you not familiar with the term, S#7T stands for

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strengths, weaknesses, opportunities and threats. 34m sure each and every person reading this article would have

interesting insights into the S#7T analysis as it applies to the !ension Section, and needless to say, so did the

!ension Section ?ouncil members. #hile 3 don4t have room in this article to share all the discussions, 3 will highlight

some of the consensus points.

Some of the key strengths that we see in the !ension Section are the S704s rigorous credentialing along with a

positive public perception of actuaries in the pension area. 3n addition, the !ension Section has released a substantial

amount of research that is currentGleading edge and relevant and has sponsored a number of uni6ue education

sessions for pension actuaries through both the S70 0nnual eeting and multiple webcasts each year. The facts that

pension actuaries typically have a variety of business skills and help manage numerous risks were also seen as key

strengths.

 0 lot of the discussion of weaknesses centered on the volunteer nature of our organiFation. 0s you may or may not be

aware, most of the work that the !ension Section does is spearheaded by numerous volunteers. #e continue to

struggle with too few volunteers, often spread too thin. 3n some cases, volunteers may have a perceived conflict of

interest between their company ob:ectives and the work of the !ension Section. 0nother weakness that garnered a

fair amount of attention was the lack of awareness of the S70 research along with the theoretical nature of some of

that work. There was also some concern regarding the need for better understanding of mortality and longevity issues

both in and out of our profession.

There was no shortage of threats identified for pensions. 3t is no surprise that the government deficits and potential

cuts to retirement benefit e*penditures is a ma:or concern. The state of underfunding and volatility of funding for

defined benefit plans also threatens the remaining open plans. 0ctuaries in general, and pension actuaries in

particular, have a reputation for making things overly complicated and perhaps have limited our abilities to e*pand

into other areas. The !ension Section itself has been losing people to other professions and areas of interest.

@espite all the discussion of the weaknesses and threats, we believe that there are a lot of opportunities for our

section. #e believe that the current retirement crisis along with public plan issues can be leveraged to influence

public policy. 3n some cases, we have opportunities to learn from parallel issues in other parts of the world. )or

instance, the United Iingdom seems to be a little ahead of where we are in the United States regarding pension

issues=particularly on their analysis of longevity issues. #e believe that the !ension Section would benefit from a

plain language translation of the research that has been completed along with ideas for practical application. There

are opportunities to e*pand the work that pension actuaries do by focusing on individuals4 retirement needs, finding

ways to transfer our skills to @? consulting and educating the public on retirement risks and financial literacy.

The !ension Section ?ouncil has taken the results of this S#7T analysis under consideration, and we are analyFing

ways that we can either attack our weaknesses and threats or take advantage of the strengths and opportunities that

e*ist. 3 look forward to sharing our progress in these efforts in future articles.

h!!ps:OO***.so#.o$O;e*s#nP')+i(#!ionsO;e*s+e!!e$sOPensionSe(!ion

;e*sO2012O%e)$'#$yOCh#i$pe$sonsCo$ne$.#sp

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 The ($isis in e3ne )ene3! (o$po$#!e pension +i#)i+i!ies P#$! II:

C'$$en! so+'!ions #n %'!'$e p$ospe(!s

Gordon L Clark 1 and Ashby H B Monk 2

Correspondence: Ashby Monk, Oxford Uniersi!y Cen!re for !he "niron#en!, $o%!h &arks 'd(, Oxford O)1 *+, U-( ".#ail:ashby(#onk/chch(ox(ac(%k 

1is !he Halford Mackinder &rofessor of Geo0raphy a! !he Uniersi!y of Oxford and &rofessorial ello of $! &e!er3s Colle0e, Oxford( He is also a senior

research fello a! Harard Uniersi!y3s Labor and 4orklife &ro0ra#( 5he a%!hor of  Pensions and Corporate Restructuring in American Industry67ohns

Hopkins Uniersi!y &ress 188*9, Pension Fund Capitalism 6Oxford Uniersi!y &ress 29 and European Pensions & Global Finance 6Oxford Uniersi!y

&ress 2*9, he is !he co.edi!or of The Oxord !andboo" o Pensions and Retirement Income  6Oxford Uniersi!y &ress 2;9(

2is a &h< candida!e a! Chris! Ch%rch Colle0e, Uniersi!y of Oxford( His doc!oral research foc%ses on !he i#pac! of co#pe!i!ie s!ra!e0y and 0lobalisa!ion

on !he desi0n and i#ple#en!a!ion of corpora!e benefi! sys!e#s( He holds 0rad%a!e and %nder0rad%a!e econo#ics de0rees fro# !he $orbonne 6&aris =9 and

&rince!on Uniersi!y, respec!iely(

'eceied 1> <ece#ber 2;? 'eised 1> <ece#ber 2;(

 Top o% p#e

-)s!$#(!

Once an integral component of company-sponsored compensation schemes in many Western economies,

private defined benefit (DB) pensions are in decline. For many, DB schemes (and their related healthcare

liabilities, depending on the jrisdiction) have hobbled the financial !ellbeing of plan sponsors and even

!hole sectors of indstry. "f a constraint on shareholder vale in the short term, these schemes threaten long-

term corporate srvival in the emerging global economy. While there remains considerable debate over the

ability of financial mar#ets to ade$ately price DB liabilities, there is a gro!ing indstry devoted to

estimating their long-term ris#s !ith respect to longevity, inflation and cost. "n part " of this t!o-part paper,

!e srveyed the natre and significance of the problem, focsing pon the %& and the %' private employer-

sponsored plans. We sggested that the crisis !as apparent, for those !illing to loo#, a decade ago. "ts

significance !as papered over by the **+s stoc# mar#et bbble and high interest rates bt has retrned

throgh !hat many analysts identify as a perfect storm. aving docmented the natre and scope of the

perfect storm, !e no! evalate in part "" the proffered soltions to the crisis, sch as financial engineering,

government intervention and private sector negotiation. "n the final sections of the paper, !e set ot the

principles that shold gide the design of ne! #inds of employer-sponsored plans noting that if, as sggested

by many eperts, Western economies are entering an era of increasing labor shortage, private pensions !ill

contine to have an important role in managing hman capital.

Key*o$s:

&ension crisis, finance, sol%!ions, f%!%re prospec!s

 Top o% p#e

In!$o'(!ion

Once an in!e0ral co#ponen! of co#pany.sponsored co#pensa!ion sche#es in #any 4es!ern econo#ies, defined

 benefi! 6<B9 pensions hae hobbled !he financial ellbein0 of plan sponsors and een hole sec!ors of ind%s!ry( =n

 par! = of !his paper, e de#ons!ra!ed !ha! hile asse! #ana0e#en!, ac!%arial and acco%n!in0 shor!co#in0s se! !he

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s!a0e for !he 3perfec! s!or#3, !he ac!%al i#pe!%s for !he presen! 3pension crisis3 as #ore co#plica!ed 6see Mana0in0

5he B%rden and Marke! ail%re9( =ndeed, 0ien !he !%#%l!%o%s na!%re of capi!alis#, !he inheri!ed <B ins!i!%!ion is

cons!rainin0 fir# reneal and renoa!ion necessary for s%ccess in !he #odern 0lobal econo#y( <B plan sponsors

are !ied !o !he pas!, forced !o face !he f%!%re i!h inefficien! and o%!da!ed or0anisa!ional s!r%c!%res and co#pe!i!ie

s!ra!e0ies 6see $cope of !he &roble#9(

4e no !%rn in par! == !o !he proffered sol%!ions !o !he pension crisis( 5o be0in i!h, e ar0%e !ha! !he c%rren!

!oolbox of sol%!ions, s%ch as ne0o!ia!ed a0ree#en!s be!een !he i#plica!ed par!ies 6nex! sec!ion9, 0oern#en!

re0%la!ion 6sec!ion ra#eork for 0oern#en! in!eren!ion9 and financial prod%c!s s!r%c!%red !o be!!er #a!ch i!h

liabili!ies 6sec!ion ra#eork for a #arke! sol%!ion9 are inade@%a!e( $%bse@%en!ly, e sho !ha! !he dear!h of iable

lon0.!er# sol%!ions s!e#s, in par!, fro# an inabili!y !o red%ce !he hi0h cos! of <B pension obli0a!ions, since

con!rib%!ions #%s! be hi0h eno%0h !o pay for ha! #ay be decades of inac!ii!y 6sec!ion 'eali!y check: &ensions are

expensie9( inally, e ar0%e !ha! dis!rib%!in0 !he hi0h cos! of occ%pa!ional pensions, in a #anner !ha! does no!

i#pac! in %nin!ended ays !he core opera!ions of !he plan sponsor, is necessary 6sec!ion 5he principles for a

s%s!ainable #odel9( 4e concl%de par! == i!h a road #ap for plan sponsors in!en! on eolin0 !oards less

cons!ric!in0 pension proisions( =n all cases, !he pa!h forard for !he <B pension crisis sho%ld be a pria!e.sec!or

sol%!ion 6perhaps facili!a!ed by 0oern#en! in!eren!ions9 !ha! achiees a ne pension s!r%c!%re in hich orkers,

e#ployers and shareholders share !he pension cos! 6al!ho%0h perhaps no! !he pension risk9 coopera!iely and fairlyfor !he benefi! of all par!ies(

5he sec!ion belo b%ilds on preio%s sec!ionsfro# 3&ar! =: 5he 3Crisis3 in <efined Benefi! Corpora!e &ension

Liabili!ies: $cope of !he &roble#3, preio%sly p%blished in Pensions(

 Top o% p#e

A$#"e*o$ %o$ # neo!i#!e so+'!ion

;eo!i#!ions $eF'i$e s#($i3(e

=n bo!h !he U- and !he U$, a resol%!ion of !he <B kno! #%s! be fo%nd for e#ployers, e#ployees, shareholders and

een !axpayers( A 3na!%ral3 sol%!ion !o !he <B pension crisis o%ld be con!rac! rene0o!ia!ion( or ne0o!ia!ions !o

s%cceed, hoeer, each par!y needs !o be illin0 !o sacrifice, and !he leel of co#pro#ise re@%ired !o res!r%c!%re

loo#in0 pension b%rdens does no! see# readily aailable in !oday3s eniron#en!( =ndeed, in order !o achiee a cos!.

effec!ie ne0o!ia!ed sol%!ion !o !he crisis, pria!e sol%!ions re@%ire infor#a!ional and bar0ainin0.poer sy##e!ry as

ell as oerco#in0 #isali0ned in!eres!s d%e !o principala0en! proble#s, a !all order (1 5he co#pe!in0 in!eres!s of

le0isla!ors, shareholders, MA #erchan!s, b%y.o%! #arke!s, pria!e e@%i!y #arke!s, ins%rance #arke!s and orkers

6re!ired and ac!ie9 !hrea!en !he prospec! of ne0o!ia!ions( $ponsors are also responsible as !hey all appear ery keen

!o p%sh !he liabili!y forard !o f%!%re 0enera!ions of #ana0ers !o deal i!h and, in !he case of U$ sponsors, %se

 bankr%p!cy co%r!s as a bailo%! or as a #eans of con!rollin0 ne0o!ia!ions(

Co++e(!ie )$e#o*n? 

One 0ro%p ill re@%ire !he #os! conincin0: or0anised labo%r( 5he %nions3 his!orical role in pension proision

de#ons!ra!es !ha! !heir a0ree#en!, in par!ic%lar, is i!al !o a s%ccessf%lly ne0o!ia!ed o%!co#e( 5he presence of

or0anised labo%r in pos! 44== #an%fac!%rin0 ind%s!ries droe !he ori0inal idespread i#ple#en!a!ion of <B

 pensions(2 Al!ho%0h eakened, !he %nions hae re!ained #%ch of !heir bar0ainin0 poer in !hose ind%s!ries 6if no!

 beyond9(* As no!ed in &ar! = %nionised orkers in !he U$ are ro%0hly fo%r !o fie !i#es as likely !o receie <B

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 pension benefi!s as non%nionised orkers(> 5his sho%ld no! be s%rprisin0, as %nions !end !o %se !heir bar0ainin0

 poer !o p%sh a0es aboe #arke!.clearin0 leels( =! is no! o%r in!en!ion !o a!!ack %nions, as acade#ic research has

also shon !ha! %nions #ay increase labo%r prod%c!ii!y(;, D, E and 8 =n any case, dis#an!lin0 !he !radi!ional <B pension

sche#es ill re@%ire so#e sor! of %nion par!nership and coopera!ion(

=n !he U-, of co%rse, 5he &ension 'e0%la!or has ass%#ed !he role of 3hones! broker3 and is heaily inoled in

crea!in0 sol%!ions for bo!h plan sponsors and beneficiaries( 5his role incl%des bein0 a 3crisis #ana0er3 for plan

sponsors !hrea!ened by defa%l! or insolency( Mos! i#por!an!ly, hoeer, 5he &ension 'e0%la!or also ac!s as

3facili!a!or3 of financial #arke! !ransac!ions here pension liabili!ies are a #aFor considera!ion 6see !he Marconi and

BAA deals9( As s%ch, 5he 'e0%la!or is ieed in !he #arke!place as an en0a0ed !hird par!y ra!her !han si#ply as a

cons!rain! on deal #akin0( inally, 5he 'e0%la!or only 0%aran!ees a frac!ion of !he accr%ed benefi! as co#pared !o

!he &ension Benefi! G%aran!y Corpora!ion 6&BGC9, hich #eans all par!ies are #ore illin0 !o #ake concessions(

In se#$(h o% # ne* "oe+

=n order !o #ake a fresh s!ar! and increase !he likelihood of achiein0 s%ccessf%l ne0o!ia!ions, sponsors sho%ld be

foc%sed on bo!h 3cos!.c%!!in03 and 3risk.c%!!in03 6ie risk !ransfer9( 5radi!ional <B pensions ill no! be aailable !o

ne e#ployees for #%ch lon0er i!ho%! cos! red%c!ions( or ne pension cons!r%c!s !o be s%s!ainable and sec%re,hoeer, !hey ill need !o dis!rib%!e !he risks inheren! !o <B pension plans in ays !ha! are ne%!ral i!h respec! !o

corpora!e s!r%c!%re( One sys!e# of!en la%ded in !his con!ex! is in !he e!herlands( 4e no !%rn !o !he <%!ch

occ%pa!ional #odel for inspira!ion(

S's!#in#)+e DB

 

7an iFsen, C"O of =G, recen!ly s!a!ed, 35he e!herlands #ay be !he co%n!ry i!h !he hi0hes! likelihood of

keepin0 a lon0.!er# s%s!ainable defined benefi! sys!e#(31 5he e!herlands offers a flexible and !ransparen!

#anda!ory second pillar pension s!r%c!%re !ha! has coninced so#e of i!s s%s!ainabili!y( Accordin0 !o !he <%!ch

cen!ral bank, pension re0%la!ion sho%ld be s!ric! eno%0h !o safe0%ard solency, b%! no! so res!ric!ie as !o in!erfere

i!h op!i#al #ana0e#en! policies( Addi!ionally, i! beliees !ha! oerly seere f%ndin0 r%les o%ld co#po%nd !he

!rend for pension f%nd sponsors !o red%ce 0%aran!ees or si!ch !o <C plans(11

Rii Qei)i+i!y

 

5he <%!ch sys!e# co#bines inflexible solency re@%ire#en!s for 0%aran!eed no#inal pension ri0h!s i!h hi0h

leels of flexibili!y for condi!ional pension ri0h!s(

Riii!y

 

<%!ch pension f%nds are re@%ired !o #ain!ain a f%ndin0 coera0e ra!io of 1 per cen! a! all !i#es( Any drop belo

!his leel of f%ndin0 re@%ires a resol%!ion in one year( =n addi!ion, pensions need !o b%ild %p a c%shion of %p !o 1*

 per cen!, hich aries accordin0 !o !he risk profile of !he asse!s in !he por!folio(12 5hese are s!ric! re@%ire#en!s !ha!

ens%re fir#s ill hae eno%0h capi!al !o pay a! leas! no#inal benefi!s( 5his approach !o sec%rin0 !he pension benefi!

can be explained by !he fac! !ha! !he pension re0%la!or &- 6no in!e0ra!ed in!o !he <%!ch a!ional Bank9 also

re0%la!es !he ins%rance ind%s!ry(

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A+ei)i+i!y

 

&ension f%nds hae reco%rse !o !hree #ain !ools i!h hich !hey can affec! !heir f%ndin0 s!a!%s: con!rib%!ion policy,

indexa!ion policy and ines!#en! s!ra!e0y(1* 4hen in %nf%nded s!a!es, f%nds can re@%ire increased con!rib%!ions,

fores!all !he indexa!ion of benefi!s andIor chan0e !he ines!#en! s!ra!e0y( or condi!ional pension ri0h!s 6indexed9,

f%nds are no! re@%ired !o resere ex!ra capi!al( 4hile indexed benefi!s are enco%ra0ed 6and are of!en proided9, only

no#inal benefi!s are 0%aran!eed( =n addi!ion, benefi!s are lar0ely based on !he aera0e a0e ra!her !han on !he final

salary, red%cin0 f%nds3 expos%re !o a0e infla!ion risks(

- ne* hope?

 

5he <%!ch #odel co%ld be enli0h!enin0 for re0%la!ors in !he U- and !he U$ facin0 <B pension crisis( =ndeed, !he

flexibili!ies b%il! in!o !he <%!ch <B pension deal 0ie i! a <C.like flao%r? benefi!s paid are, in par!, a f%nc!ion of

con!rib%!ions and ines!#en! re!%rns, !hereby red%cin0 !he risks on !he sponsorin0 or0anisa!ions( Hoeer, !his is

#os! likely !o be !he 3end.#odel3 no! !o e#%la!e( 5he dindlin0 or0anised labo%r #oe#en!s of !he U- and !he U$

s%00es! !ha! !his o%ld be diffic%l! !o achiee as social solidari!y %nderpins !he hole <%!ch pensionfra#eork (1>Moreoer, !he no#inal 0%aran!ee of benefi!s can s!ill ca%se proble#s be!een s!akeholders oer ho

!hese 0%aran!ees sho%ld be al%ed and f%nded 6see sec!ion, 5he principles for a s%s!ainable #odel: ne%!rali!y9(

 Top o% p#e

A$#"e*o$ %o$ oe$n"en! in!e$en!ion

Se('$i!y #)oe (os!s

O%!so%rcin0 s%pple#en!ary pension proision !o !he pria!e sec!or, a desired 0oal of !he U- and !he U$

0oern#en!s oer !he pas! years 6i!ness !he si0nificance of !ax benefi!s on e#ployee and e#ployer

con!rib%!ions9, needs !o be %nder!aken i!h d%e re0ard !o !he dis!rib%!ion of cos!s and risks(1 5he 0oern#en!s3

c%rren! illin0ness !o eli#ina!e !he possibili!y of defa%l!, hoeer, has concen!ra!ed i!h plan sponsors bo!h !he

cos!s and !he risks of a <B plan( =n!eres!in0ly, 0ien !he lon0 his!ory of occ%pa!ional pension proision, !he firs!

serio%s foray in!o pension f%ndin0 re0%la!ion as only in 18D> J !he U$ "#ployee 'e!ire#en! =nco#e $ec%ri!y

Ac!( $ince !ha! !i#e, n%#ero%s re0%la!ions res!ric!in0 pension proision hae been passed across !he O"C<( 5h%s

far, le0isla!ion has foc%sed on i#proin0 !he sec%ri!y of plans and pro!ec!in0 !he ri0h!s of plan beneficiaries(1

Once a0ain, e face a poli!ical !%rnin0 poin! in hich 0oern#en!s ill be called %pon !o assis! in cons!r%c!in0 a

3ne3 pria!e pension a0ree#en!( or exa#ple, !he recen! U$ &ension &ro!ec!ion Ac! oerha%ls pension f%ndin0 r%les

and also seeks !o aoid a 0oern#en! bailo%! of !he belea0%ered &BGC(1; 5he U- &ension Ac! of 2>, a#on0 o!her 

!hin0s, se! %p !he &ension &ro!ec!ion %nd 6&&9 and 5he &ension 'e0%la!or, i!h !he prospec! of risk.rela!ed

ins%rance pre#i%#s( Al!ho%0h !he <%!ch pension sys!e# is on fir# 0ro%nd, !he 5- refor# packa0e re@%ires fairal%e analysis for pension liabili!ies and asse!s( =n addi!ion, 0lobal acco%n!in0 s!andards are likely !o adop! pension

al%a!ion s!andards si#ilar !o !he U- in order !o increase !ransparency(

5he need for <B pension refor# #%s! be reconciled i!h increases in #arke! dis!or!ion and sponsor cos!s, incl%din0

!hose associa!ed i!h !i0h!er f%ndin0 r%les and re@%ire#en!s( or exa#ple, increasin0 re0%la!ory cos!s co%ld lead !o

enor#o%s i#posi!ions on already i#perilled fir#s( =ndeed, !he co%n!ercyclical na!%re of f%ndin0 r%les already poses

a !hrea! !o <B s%s!ainabili!y, as co#panies #%s! f%nd #ore in don!%rns, hen !hey #i0h! no! be able !o afford i!(

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$o far, !he U- and !he U$ see# illin0 !o increase benefi! 3sec%ri!y3 in spi!e of i!s cons!ric!in0 financial effec!s on

sponsorin0 fir#s, !i0h!enin0 !he 3kno! of con!rac!s3 and reinforcin0 !he prospec! of a fail%re of !he <B ins!i!%!ion(

9hy !he n'(+e#$ op!ion is no! esi$#)+e

or fir#s facin0 !his 3!i0h!enin03 s!ale#a!e, !he 0oern#en! bailo%! ia bankr%p!cy in !he U$ and ia !he && in !he

U- #ay appear !o be !he only ay !o proceed( =n fac!, !he U$ airline ind%s!ry proides a 0ood exa#ple of !his

clai#: in 2, <el!a, or!hes!, Uni!ed Airlines and U$ Airays all filed for Chap!er 11 bankr%p!cy( A#erican

Airlines is !he only le0acy carrier !ha! has no! ye! resor!ed !o co%r!.ordered res!r%c!%rin0( 5his, hoeer, p%!s

A#erican Airlines a! a disadan!a0e as i!s co#pe!i!ors are expec!ed !o exi! Chap!er 11 i!h heal!hier balance shee!s

and loer c%rren! pension cos!s( =n effec!, !he c%rren! crop of co#panies e#er0in0 fro# Chap!er 11 are in #%ch

 be!!er financial shape(

;o! esi$#)+e

 

 o fir# sho%ld hae a pension in!eres! in declarin0 bankr%p!cy( B%! !hose i!h debili!a!in0 <B pension obli0a!ions

are see#in0ly lef! i!h no o!her op!ion( 5his is a diffic%l! and %ndesirable pa!h( =f !o!al liabili!ies are 0rea!er !hanasse!s 6as is of!en !he case for fir#s i!h lar0e %nf%nded pension liabili!ies9, bankr%p!cy %s%ally res%l!s in

 bondholders endin0 %p i!h shares, shareholders endin0 %p i!h hardly any!hin0, orkers endin0 %p i!h #%ch

loer benefi!s and a0es and #ana0e#en!3s foc%s bein0 dran aay fro# core b%siness( 5he !ransac!ion cos!s are

ex!re#ely hi0h, and !he brink#anship associa!ed i!h a bankr%p!cy proceedin0 is an!i!he!ical !o ne0o!ia!ed

a0ree#en!s( 5here are n%#ero%s oppor!%ni!ies for hold.%p or hold.o%!(1D inally, !he co%r!s ill no! necessarily do an

effec!ie Fob of res!r%c!%rin0( =ndeed, !he co%r!s are hardly pension ne0o!ia!ors by !rainin0 and exper!ise(1E

 Top o% p#e

A$#"e*o$ %o$ # "#$e! so+'!ion

9#++ S!$ee! so+'!ions

=n !he absence of a ne0o!ia!ed or 0oern#en! sol%!ion, innoa!ie financial prod%c!s and ines!#en! s!ra!e0ies are

findin0 a ho#e i!hin !he pension co##%ni!y( 5he ea0erness of plan sponsors !o chan0e erran! ines!#en! s!ra!e0ies

of !he la!e 188s, co#bined i!h !he prospec! of increased balance shee! ola!ili!y d%e !o #ark.!o.#arke! pension

acco%n!in0, has sparked idespread in!eres! a#on0 <B pension f%nds in risk i##%nisa!ion and liabili!y

#ana0e#en!(

5he pension plans, hoeer, lookin0 for lon0.!er# sol%!ions !o !heir pension oes in financial prod%c!s #ay be

disappoin!ed( <B pension proiders face #any risks, so#e hed0eable and so#e no!, all of hich pose serio%s !hrea!s

!o pension heal!h(18 5he 3%nhed0eables3 hae !h%s far been resis!an! !o !he financial co##%ni!y3s a!!e#p!s !o #i!i0a!e

!he#( 5here are exa#ples of s%ccess, s%ch as !he <ece#ber 2* $iss 'e #or!ali!y ca!as!rophe bond(2, 21 B%! s%chs%ccesses are rare and #a!ched by fail%res(22  eer!heless, financial innoa!ion is or!h exa#inin0, as i! ill ery

likely be an in!er#edia!e s!eppin0 s!one in !he pa!h !o a lon0.!er# s!able sol%!ion(

S'((ess%'+ inno#!ion

 

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&ension f%nds hae been driers of financial innoa!ion for decades, as !heir asse! #ana0e#en! s!ra!e0ies hae

 pro#p!ed !he proision of co#plex financial prod%c!s( $ee, for exa#ple, Ki Bodie2*: 34hile !he i##%nisa!ion

s!ra!e0ies of pension f%nds hae sp%rred innoa!ion in !he fixed inco#e sec%ri!ies #arke!s, pension f%nd con!in0en!

i##%nisa!ion and por!folio ins%rance s!ra!e0ies hae crea!ed a #arke! for op!ions and financial f%!%res con!rac!s(3

5here is no do%b! !ha! !he pec%liar re@%ire#en!s placed on pension f%nds hae been a driin0 force for financial

innoa!ion since !he 18Ds(2>

inancial innoa!ion con!in%es !oday( or ins!ance, pension f%nds are increasin0ly de#andin0 sap and deria!ie

s!ra!e0ies, as pension f%nds beco#e #ore sophis!ica!ed cons%#ers of ines!#en! adice( =f i#ple#en!ed properly,

saps can hed0e a0ains! ario%s risks,2, 2; s%ch as in!eres! ra!e chan0es(2D, 2E

Ain#n(i#+ +i"i!#!ions

 

inancial prod%c!s also offer !r%s!ees and #ana0e#en! 3s!op loss3 s!ra!e0ies, risk i##%nisa!ion, decreased balance

shee! ola!ili!y and #ore efficien! %se of pension capi!al( 4i!h !he h%0e de#and co#in0 fro# pension f%nds, !he

%nderlyin0 proble# i#pedin0 a s!r%c!%red finance sol%!ion is s%pply 6see .year Gil!s and *.year 5reas%ries,

here yields are far loer !han his!orical leels9( 5he s%pply of !hese sec%ri!ies co%ld increase as 0oern#en!s !akeadan!a0e of cheap deb!( =f, hoeer, e consider idespread i#ple#en!a!ion of s!ra!e0ies inolin0 lon0ei!y or

infla!ion.linked bonds, findin0 s%i!able s%pplies !o sere !he U- and !he U$ <B pension %nierse see#s hi0hly

%nlikely( $ap con!rac!s #ay offer #ore li@%idi!y, b%! !hey are expensie( =n addi!ion, %nf%nded plans !ha!

i#ple#en! !hese s!ra!e0ies are co##i!!ed !o #akin0 %p #os! of !heir defici! i!h increased con!rib%!ions J a

displeasin0 prospec! for shareholders(

=n addi!ion, despi!e hi0h cos!s, !hese s!ra!e0ies do no! eli#ina!e all of !he risks for !he fir#( $o#e of !he

3%nhed0eables3 6#or!ali!y risk, infla!ion risk, e!c9 ill re#ain in one for# or ano!her, leain0 !he sponsor %lnerable

in !he f%!%re(28Conse@%en!ly, sponsors allo for !he possibili!y !ha! !hey ill be ha#pered in so#e ne ay in !he

f%!%re 6F%s! as fe sa, * years a0o, !he proble#s <B pensions o%ld ca%se !oday9(

B'+e )'siness

 

=nes!#en! banks s!and !o 0ain si0nifican!ly fro# !he increased !radin0 ol%#e in s!r%c!%red financial prod%c!s?

#%l!i.billion.dollar sap deals are par!ic%larly l%cra!ie( 5his !rend has no! 0one %nno!iced, as b%l0e bracke! fir#s

 beef %p !heir pension s%perisory serices !o offer !ailor.#ade pension sol%!ions, and special!y ines!#en! shops,

s%ch as =n!e0ra!ed inance Li#i!ed,* are crea!ed !o !ake adan!a0e of !his !rend( 5he deelop#en! of specialis!s is

elco#e, as !hey ill no do%b! p%sh financial innoa!ion and raise aareness i!hin !he pension %nierse( =n order

!o be a par! of !he lon0.!er# sol%!ion !o !he <B crisis, hoeer, specialis!s need !o find innoa!ie ays !o sides!ep

capaci!y cons!rain!s and eli#ina!e !he 3%nhed0eables3( O!herise, any sin0le financial prod%c! or s!ra!e0y, no #a!!er

ho s%ccessf%l i! is on a clien!.!o.clien! basis, is no! a sol%!ion !o !he pension crisis(

ne !i"e (h#$e

inancial ins!r%#en!s can only be par!ial sol%!ions !o !he risks posed by <B pension obli0a!ions d%e !o %nhed0eable

risks and capaci!y li#i!a!ions 6a0ain #akin0 pension liabili!ies differen! fro# !radi!ional deb!9( 5herefore, plan

sponsors, keen !o aoid dier!ed cash flos and balance shee! ola!ili!y, are lookin0 !oards !he b%lk ann%i!y #arke!

and ins%rance co#panies as a possible sol%!ion !o !heir pension proble#s(*1 5he b%lk ann%i!y #arke! is a %ni@%e !ype

of o%!so%rcin0? co#panies pay ins%rers a pre#i%# for !akin0 on !heir pension asse!s and liabili!ies and re#oin0 !he

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la!en! <B pension risks fro# !he plan sponsor( A! presen!, hoeer, !his cos!ly sol%!ion is only aailable !o plans !ha!

hae reached f%ll f%ndin0(

Ris !#e$s

 

=n order for b%lk ann%i!ies !o hae idespread appeal, s%ppor!ie re0%la!ion, hich eases !he capi!al re@%ire#en!s of 

fir#s %nderri!in0 !he b%siness and clarifies !he le0ali!y of !he !ransac!ions, is re@%ired( 5his sho%ld crea!e #ore

li@%id #arke!s, as c%rren! condi!ions are %nsa!isfac!ory and an!ico#pe!i!ie( or exa#ple, !he U- Office of air

5radin0 ines!i0a!ed !he b%lk ann%i!y #arke! in 2 af!er co#plain!s of %nfair pricin0(*2 A! !he !i#e of ri!in0, !he

U- #arke! for b%lk ann%i!ies re#ains res!ric!ed, i!h &r%den!ial and Le0al General ri!in0 al#os! all of !he

 b%siness( Lo0ically, hi0her leels of co#pe!i!ion a#on0 b%lk ann%i!y proiders o%ld loer cos!s !o a #ore

reasonable leel( "nco%ra0in0ly, !his appears !o be happenin0, as fir#s and hi0h profile indiid%als are considerin0

en!erin0 !he #arke!, incl%din0 Aia, Ae0on, Mark 4ood, 4arren B%ffe!!, =sabel H%dson, H%0h Os#ond, "d#%nd

5r%ell and n%#ero%s ines!#en! banks( =ndeed, one #ana0in0 direc!or a! a b%l0e bracke! ines!#en! bank !old %s

!ha! he has !he 0reen li0h! !o ac@%ire a pension f%nd? !heir only proble# is pricin0 !he deal( =n addi!ion, 'e!iree

Benefi!s LLC is !he firs! U$ fir# !o express in!eres! in !he U$ b%y.o%! #arke!, s%00es!in0 !his #arke! is pri#ed for

0ro!h as ell( 5hese players hope !o #ake profi!s by doin0 a be!!er Fob !han pension f%nds a! #ana0in0 !hein!ersec!ion be!een asse!s and liabili!ies(

Al!ho%0h expensie, !hey are a one.!i#e char0e !ha! co%ld eli#ina!e !he sponsor3s risks( As s%ch, ia b%lk b%y.o%!s,

!radi!ional <B pension liabili!ies co%ld be 3sold off3 and ne, #ore s%s!ainable plans cons!r%c!ed( 5hese !ransac!ions

o%ld facili!a!e ins!i!%!ional sol%!ions e beliee i#por!an! 6see concl%sions9( =deally, !his serice o%ld be offered

!o f%nded and %nf%nded plans 6ia pay don periods oer a se! n%#ber of years9(

- s!eppin s!one

 

inancial #arke!s hae a cr%cial role !o play in resolin0 !he pension crisis( 5his role, hoeer, is no!, as as hoped

 by so#e, the panacea !o !he pension crisis( Bo!h ines!#en! banks and b%lk players are seekin0 !o care o%! !he <B

 pension risks and !ake !he# fro# !he sponsor( 5his is a key s!eppin0.s!one and re@%ires on0oin0 innoa!ion 6and

re0%la!ory s%ppor!9, as !he !ransfer of risks ill crea!e an openin0 for chan0e( 5he %l!i#a!e sol%!ion !o !he pension

crisis is, hoeer, ha! fills !his openin0, no! ha! crea!es i!(

Li%e+on (h#$e

Considerin0 !ha! no co#ple!e in!e0ra!ed sol%!ion exis!s, #any <B sponsors feel obli0ed !o ride o%! !heir pension

!ro%bles( One response is for sponsors !o close !heir plan !o ne en!ran!s and ork !he liabili!y off oer !he lon0

!er#( Closin0 %nderf%nded plans, hoeer, is no! i!ho%! risks, as !he #a!%ri!y of s%ch plans accelera!es i!ho%! a

s!rea# of yo%n0er par!icipan!s( =n addi!ion, #a!%re plans !ypically hae 0rea!er calls on corpora!e asse!s and

reen%es, d%e !o !he f%ndin0 cos!s associa!ed i!h par!icipan!s as !hey approach re!ire#en!( Accelera!in0 #a!%ri!yalso nor#ally pro#p!s a si!ch fro# riskier asse!s !o loer.yieldin0 safe asse!s( 5his si!ch of!en re@%ires fir#s !o

con!rib%!e #ore in order !o re!%rn plans !o f%nded leels, p%!!in0 #ore s!ress on plan sponsors and on !he #arke! for

fixed inco#e prod%c!s(** As s%ch, freein0 pensions i!h !he 0oal of earin0 don !he liabili!y oer !he lon0 !er# is

no! an effec!ie sol%!ion !o !he pension crisis? !he b%rden of a #a!%re closed <B pension co%ld o%!ei0h !ha! of an

open <B pension 6dependin0 on !he circ%#s!ances of !he plan sponsor9(*>, * Conse@%en!ly, !he decision !o close or

freee a plan #%s! be !aken in coordina!ion i!h a ell !ho%0h! o%! i##%nisa!ion and f%ndin0 s!ra!e0y 6see

concl%sions9(

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Co$po$#!e (on!$o+

<espi!e !he #edia a!!en!ion on pension defici!s a#on0 5$" 1 and $& <B plan sponsors, h%ndreds and

 perhaps !ho%sands of s#all. and #edi%#.sied corpora!ions are also bein0 forced !o cope i!h b%rdenso#e <B

 pension liabili!ies( 5hese fir#s are in a diffic%l! posi!ion, b%! !here is a sol%!ion for !hese s#aller plan sponsors !ha!

is %naailable !o lar0er fir#s: !radi!ional #er0ers and ac@%isi!ions(

As indica!ed in par! =, sponsors of #a!%rin0 <B plans se@%en!ially #ake !he#seles less co#pe!i!ie each !i#e !hey

choose c%rren! <B con!rib%!ions oer c%rren! ines!#en! in !he fir#( Moreoer, as f%ndin0 r%les are !i0h!enin0 and

 prospec!ie pension defici!s are si0nifican!, !he c%rren! 0enera!ion of #ana0ers is bein0 orced  !o priile0e

con!rib%!ions oer ines!#en!( As s%ch, for fir#s i!h <B pension defici!s, corpora!e co#pe!i!ieness, par!ic%larly

on !he in!erna!ional s!a0e, co%ld spiral donards( Al!ho%0h !his is an alar#in0 prospec! for #ana0ers of s#all

fir#s, sellin0 o%! #ay offer fir#s ano!her 3sol%!ion3 o%!side of bankr%p!cy co%r!s(

=ndeed, lar0e corpora!ions o%ld hae no proble# ac@%irin0 s#all <B plan sponsors so lon0 as !he ac@%irer has a

 benefi! plan and capi!al s!r%c!%re differen! fro# !he !ar0e!( =f !his is !he case, !he <B pension obli0a!ion co%ld be

easily #ana0ed as a ery s#all piece of !he capi!al s!r%c!%re of !he ne lar0er fir#(*; Moreoer, %sin0 i##%nisa!ion

s!ra!e0ies, !he !ar0e! co%ld #ini#ise i!s <B pension risks, #akin0 i!self a rela!iely a!!rac!ie !ar0e! and facili!a!in0#ore 0enero%s pricin0 of !he deal( $%ch a deal o%ld be elco#ed by shareholders and e#ployees, al!ho%0h

#ana0ers o%ld effec!iely be sellin0 !heir Fobs( Al!ho%0h !his is an ex!re#e 3sol%!ion3, so#e fir#s ill hae no

o!her pria!e sec!or al!erna!ies(

Pe$%e(! s!o$" III

7%s! as in!eres! ra!es and asse!s ca#e !o0e!her in 21 and 22 in a perfec! s!or# !ha! sen! pension f%ndin0 leels

 pl%##e!in0, so#e hope !ha! a par!nership of hi0h in!eres! ra!es and hi0h asse! re!%rns co%ld send plans back !o f%lly

f%nded leels, aoidin0 !he cos!ly prospec! of achiein0 f%ll f%ndin0 i!h con!rib%!ions alone( C%rren!ly, i!h shor!.

!er# in!eres! ra!es risin0, and #arke!s shoin0 resilience, defici! leels hae been 0rad%ally i#proin0 fro# !he

los seen be!een 2* and 2( Before %sherin0 in !he inerse perfec! s!or# hoeer, one needs !o re#e#ber

ho %nlikely !his o%!co#e is, as asse! #arke!s !ypically reac! inersely !o in!eres! ra!es? hen ra!es 0e! !oo hi0h,

 bond and e@%i!y #arke!s s%ffer( eer!heless, considerin0 !he perfec! s!or# =, i! is no! o%!side !he real# of

 possibili!ies and sho%ld a! leas! be considered by sponsors in scenario plannin0 J par!ic%larly considerin0 !ha!

sponsors ho are keen !o i##%nise !heir risk #ay be holdin0 asse!s !ha!, al!ho%0h be!!er reflec!in0 !heir liabili!ies,

do no! carry !he risk pre#i%# necessary !o ride a ae of asse! 0ro!h o%! of <B pension %nderf%ndin0(

 Top o% p#e

Re#+i!y (he(: Pensions #$e epensie

-No$#)i+i!y

Co#in0 !o 0rips i!h !he !r%e cos! of re!ire#en! is i!al !o cons!r%c!in0 a s%s!ainable pension deal( 6$ee Box 1 in

Appendix for &GGM3s =nnoa!ie air al%e #odel(9 $i#ply s!a!ed, pensions and re!ire#en! are ex!re#ely

expensie( Moreoer, hile ne0o!ia!ions offer a #echanis# for sharin0 !he risk b%rden, and financial prod%c!s offer

a ay of hed0in0 a0ains! so#e priceable risks, nei!her are effec!ie a! red%cin0 c%rren! cos!s( =ndeed, i!hin a

!radi!ional <B pension, !he benefi! re#ains inflexible and 0enero%s, a !oxic #ix(

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Bo 1 PGGMs %#i$ #+'e "oe+.

A'++ !#)+e

-!+#s !he !i!#n

 

As of !he #id.188s 6!he #os! recen! da!a aailable fro# !he U$ B%rea% of Labor $!a!is!ics9, in #edi%# and lar0e

 pria!e es!ablish#en!s, only * per cen! of e#ployees i!h <B pensions ere re@%ired !o con!rib%!e !o !heir <B

 pensions(*D

 Al!ho%0h !his percen!a0e has no do%b! risen, 0ien !he ex!en! of c%rren! %nderf%ndin0, i! none!helesss%00es!s !ha! fir#s hae had !o sho%lder a lar0e por!ion of !he increase in pension cos!s oer !he pas! decade( *E =n !he

U-, <B con!rib%!ions hae increased fro# 1(E per cen! in 22 !o 22 per cen! of earnin0s in 2 6Associa!ion of

Cons%l!in0 Ac!%aries &ension 5rends $%rey 29(*8 e!, !he percen!a0e paid by !he e#ployer has risen #ore !han

!he por!ion paid !hro%0h e#ployee con!rib%!ions 6e#ployers3 por!ion is %p by per cen! b%! e#ployees3 by F%s! 1(2

 per cen! since 229( 5his de#ons!ra!es !he oer.ei0h!in0 of cos! i!h !he sponsor and !he inabili!y !o

#eanin0f%lly chan0e con!rib%!ion policies !o #ee! !he hi0h cos! of pensions(

Undeniably, !he dear!h of iable lon0.!er# sol%!ions !o !he pension crisis s!e#s in par! fro# !he inabili!y !o red%ce

!he hi0h cos! of re!ire#en!( 4i!h !he #arke! re!%rns on !he asse! pools no lon0er able !o keep %p i!h !he 0enerosi!y

of benefi!s, con!rib%!ion leels #%s! be se! hi0h eno%0h !o aoid an %ns!able plan( As a firs! s!ep, if <B pensions

shared !his cos! #ore e@%i!ably be!een orkers and plan sponsors in ays !ha! ere 3ne%!ral3 i!h respec! !o fir#

effec!s, !hen !he sys!e# co%ld conceiably f%nc!ion efficien!ly(

Con!$i)'!ions )e%o$e )ene3!s

4hile c%rren! ne0o!ia!ions be!een e#ployers and e#ployees foc%s heaily on benefi! leels, perhaps a near.!er#

3sol%!ion3 co%ld be a ne bar0ain oer !he correc! con!rib%!ion ra!e( =ndeed, benefi! leels are rendered irrelean! if

ins%fficien! cash is se! aside for pension f%ndin0( 'aisin0 e#ployee con!rib%!ions is one possible s!ep forard in

sharin0 cos!s( or exa#ple, a benefi! for#%la !ha! increased e#ployee con!rib%!ions hen a0es 0o %p 6as o%ld

happen if e#ployees are re@%ired !o 0ie a percen!a0e of !heir salary9 is an effec!ie par!ial hed0e for !he sponsor

a0ains! a0e infla!ion( Moreoer, as e no!e la!er on, linkin0 a con!rib%!ion increase hen a pay raise is 0ien is

less painf%l for e#ployees, ra!her !han !ryin0 !o increase con!rib%!ions o%!ri0h!(> =n addi!ion, 3cos! sharin03 con!rac!s

!ha! las! for fie !o !en years, in hich con!rib%!ion leels for plan sponsors are fixed, o%ld decrease ola!ili!y andincrease <B pension s%s!ainabili!y(

Use%'+ in!e$en!ion

 

Chan0in0 e#ployee con!rib%!ions is no! s!rai0h!forard( "en if !he pension coenan! o%ld allo i!, a chan0e in

con!rib%!ion leels co%ld breach !he e#ploy#en! con!rac!(>1 $%ch considera!ions are serio%s, and !hey #ay res!ric! a

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fir#3s abili!y !o ac!( =n case of ne0o!ia!ion.paralysis, collec!ie elfare #ay be sered if !he 0oern#en! ere !o se!

con!rib%!ion 0%idelines 6ra!her !han f%ndin0 r%les9 for bo!h e#ployees and e#ployers in a #anner !ha! shares cos!s(>2

'!+oo

 

<B pensions are inheren!ly expensie and, as !he firs! fe years of !his decade de#ons!ra!e, preio%s a!!e#p!s !o

find shor!c%!s hae ended in hardship( Unders!andin0 !he !r%e cos! of pensions is i#por!an!, and sharin0 !he b%rden

of !ha! cos! ill be essen!ial for f%!%re endeao%rs(>* Of co%rse, si#ply i#ple#en!in0 a hike in e#ployee

con!rib%!ion ra!es does no! re#oe !he b%rden of !he <B pension obli0a!ion 6and !he associa!ed risks9 fro# !he fir#(

 eer!heless, %nders!andin0 ho con!rib%!ion ra!es i#pac! pension benefi!s ill be necessary for !he cons!r%c!ion of 

an ins!i!%!ional sol%!ion(

 Top o% p#e

 The p$in(ip+es %o$ # s's!#in#)+e "oe+

- i=('+! p#!h

Hi0hli0h!in0 !he principles of s%s!ainabili!y is i#por!an!, beca%se sol%!ions !o !he pension crisis are so diffic%l! !o

find and F%s!ify !o s!akeholders( Belo, e hae lis!ed fie par!ic%larly i#por!an! principles !ha! ill need !o be

incorpora!ed in any iable sol%!ion(

P#$e!o i"p$oe"en!

 

5he s%ccess of any ins!i!%!ional sol%!ion or refor# relies on #ain!ainin0 !he fir#s3 #arke! co#pe!i!ieness hile

#ini#isin0 har# !o e#ployees( =n eal%a!in0 !he elfare of !he e#ployee, hoeer, one #%s! exa#ine eery!hin0:

@%ali!y of life, lon0ei!y, Fob sec%ri!y, early re!ire#en!, co#pensa!ion, e!c( =n !his con!ex!, if life is lon0er, and all

o!her ariables re#ain !he sa#e, !he e#ployee is be!!er off? in con!ras!, !he fir# is orse off, as i! has !o s%ppor! !he

e#ployee3s ex!ended life i!ho%! receiin0 any!hin0 in re!%rn( =n order !o achiee a &are!o i#proe#en!, !he 0ain in

lon0ei!y for !he e#ployee o%ld hae !o leae !he fir# no orse off( As s%ch, increased lon0ei!y sho%ld be paired

i!h a lon0er orkin0 life or #ore flexible con!rib%!ions and benefi!s( 5here are !rade.offs !o be #ade in !his crisis

in order !o ri0h! !he ron0s of !he pas! decades and !o achiee a feasible sol%!ion !o !he c%rren! dile##a(

Un!yin !he no!

 

All <B sponsors ill need !o look for ays !o 3%n!ie !he kno!3 and %nrael !he con!rac!s( or !hose fir#s i!h hi0h

leels of %nionisa!ion, bindin0 arbi!ra!ion co%ld be a ay of aoidin0 bankr%p!cy( =n addi!ion, for !hose fir#s !ha!

can afford i!, financial #arke!s offer so#e effec!ie op!ions, s%ch as b%lk b%y.o%!s( Many co#panies, hoeer, hope!ha! !he ay forard is a 0enera!ional one, in hich ne e#ployees are no! offered <B pensions, and !he inheri!ed

liabili!y of <B sche#es is orked off by !hose e#ployees oer !he lon0 !er#( e!, le!!in0 !he liabili!y ind don is

a slo process, and #ay !ake seeral decades( or fir#s facin0 s!iff #arke! co#pe!i!ion and de#ands fro#

shareholders, !his #ay be !oo lon0(

Goo oe$n"en!

 

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<espi!e pas! #isF%d0#en!s, 0oern#en!s s!ill hae a si0nifican! role !o play in resolin0 !he pension crisis( 4i!ho%!

ne re0%la!ions 0oernin0 con!rib%!ions and enco%ra0in0 !he for#a!ion of a #arke! for b%lk b%y.o%!s, pria!e sec!or 

sol%!ions #ay be s!y#ied? !he re#ainin0 op!ion is a bailo%!( 'e0%la!ion sho%ld, hoeer, enco%ra0e !he proision of 

 plans !ha! are 3ne%!ral3 i!h respec! !o corpora!e s!r%c!%re and, #ore i#por!an!ly, facili!a!e !he !ransi!ion of !radi!ional

<B pensions !o so#e!hin0 else( =n addi!ion, corpora!e co#pensa!ion prac!ices hae chan0ed as fas! as corpora!e

s!r%c!%re, s%00es!in0 !ha! roo# needs !o be lef! for co#pensa!ion and benefi! flexibili!y( inally, and perhaps #os!

i#por!an!ly, beca%se pension proision in !he pria!e sec!or is ol%n!ary, re0%la!ions #%s! no! conf%se !he obFec!ies

of !he fir#, hich o%ld only res%l! in nonproision(>>

;e'!$#+i!y

 

Once !radi!ional pria!e sec!or <B pensions are 0one, fir#s ill need !o !ake !heir pension desi0n back !o !heir

co#pensa!ion prac!ices( $pecifically, fir#s are increasin0ly callin0 for plans !ha! share risk? b%! for 3risk sharin03 !o

#oe pensions !oards s%s!ainabili!y, i! #%s! only be a s!eppin0.s!one in !he pa!h !oards 3ne%!rali!y3( e%!rali!y

#eans !ha! !he pension plan does no! i#pac! !he core opera!ions of !he b%siness in %nin!ended ays, hich s%00es!s

!ha! !he risks, al!ho%0h no! !he cos!s, of !he pension #i0h! hae !o fall on !he e#ployee 6see Concl%sions for #ore

de!ails9( Collec!ie risk sharin0 is hi0hly co#plex(>, >;

 =n !radi!ional <B pensions, !he only si!%a!ion here conflic! be!een s!akeholders can be aoided, fro# a 0a#e !heory perspec!ie, is hen f%ndin0 is exac!ly 1 per cen!, since

o%!side of !his e@%ilibri%# each par!y ill a!!e#p! !o 3in3 !he s%rpl%s or 3in3 !he ri0h! no! !o on !he defici!(>D 5h%s,

if e#ployer.sponsored pensions are !o re#ain, 3risk sharin03 ill no! be a sol%!ion on i!s on, as each s!akeholder

ill inei!ably look !o 3in3( Conse@%en!ly, ne%!rali!y i#plies 3risk c%!!in03, al!ho%0h no! necessarily 3cos! c%!!in03, for 

!he fir#(>E =n any case, !he c%rren! conol%!ed risk s!r%c!%re needs !o be %n!an0led(

Inno#!ion

 

4idespread ins!i!%!ional chan0e is 0oin0 !o co#e fro# innoa!ion, as ne pension plan desi0ns ill ideally offer

fir#s #ore s%s!ainable op!ions( or exa#ple, hybrid pension sche#es are one #echanis# of enco%ra0in0

ins!i!%!ional innoa!ion( Many fir#s see hybrids as a ay !o rei!alise !heir <B plan s!r%c!%re( =ndeed, hybrids are a

 be!!er op!ion !han con!in%in0 i!h a 3rene0o!ia!ed3 !radi!ional <B plan, al!ho%0h !his depends on !he ins!i!%!ional se!.

%p in !he co%n!ry( Hybrids, s%ch as cash balance plans, are re0%la!ed as if !hey are <B, b%! !he asse!s and liabili!ies

0ro as if !hey are <C, i!h con!rib%!ions and a pro#ised re!%rn 6%s%ally so#e 5.bill ra!e9( 5he benefi! is !hen paid

as a l%#p s%#, ra!her !han as an ann%i!y(>8 =n !er#s of adan!a0es, hybrids offer a #ore een accr%al ra!e !han

!radi!ional plans( Also, !hey do no! penalise Fob #obili!y( Hybrids also allo sponsors !o co##%nica!e pension

al%es !o e#ployees in a ay !ha! is ery si#ilar !o <C, i!h acco%n! al%es and no#inal accr%als each year(

Ano!her benefi! of hybrids is !he abolish#en! of early re!ire#en! proisions !ha! are !ypically par! of !he oerly

0enero%s <B pension deal( =n!eres!in0ly, een !he A#erican edera!ion of Labor and Con0ress of =nd%s!rial

Or0ania!ions 6AL.C=O9 and !he $erice "#ployees =n!erna!ional Union hae been ines!i0a!in0 hybrid #odels in

an effor! !o co#ba! anin0 pension coera0e( Hybrids are no do%b! an innoa!ie al!erna!ie !o !radi!ional <B

 pensions and a feasible ins!i!%!ional sol%!ion(

Topof page

Conclusions

A past generation of managers has made commitments requiring urgent renegotiation in the

present in order to avoid institutional failure in the future. This pension crisis is worsened by

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the fact that government regulations have provided misguided incentives and compounded

the problem, neutering the possibility of achieving a private sector solution and making

government bailouts a first-order choice. Bearing in mind that there is no silver bullet or

cost- or risk-free solution to the pension crisis, a road map is still necessary so those firms

faced with the burden of a !B pension can understand what is at stake and what choices

are available. "lan sponsors will first need to evaluate their own situation in order todetermine their final destination, as plan health will ultimately dictate what is available and

possible. #evertheless, we believe four broad reform$restructuring paths can be

implemented%

"lan A% &emoval and replacement

"lan A is the most complicated of the four options offered here as the !B plan has to be

removed before it can be replaced. 'oreover, in order to remove the pension, plan A relies

on using solutions that have failed thus far ( the hope would be that negotiations,

government intervention and financial and insurance products can be successfully combined

and implemented in innovative ways. #evertheless, each firm must consider its ownsituation, as the path taken by a well-funded plan will differ from that of an underfunded

plan. The road map below is intended for the underfunded pension plan, which suggests

that some steps could be passed over by a healthy !B pension. Although we are aware of

the heroic nature of this undertaking, we argue that this is not impossible and is still the

best path forward out of the pension crisis. )ach of these phases on their own is not an

adequate solution, but together they offer a road map to the future%

*. Contribute% "lan sponsors should start by re-negotiating contribution levels and$or

benefit levels +government involvement will most likely be required in this first phasedue to the many complications in renegotiating. !B pensions are simply too

epensive and generous for the firm to shoulder the entire burden. Changing benefit

levels or sharing the burden of contributions will help put precarious plans on afirmer footing. +This should not be seen as a solution in its own right% ust asmanagers /0 years ago could not foresee the burden of the !B plan, it is also risky

to leave renegotiated traditional !B plans in place.

1. 2mmunise% 3inancial immunisation, although incomplete, will be a useful tool for

firms looking to transition out of their traditional !B pension. The plan can bepartially neutralised +possibly even to longevity risk if financial markets can

innovate. 'oreover, married with equitable contribution and benefit policies, theplan sponsor will not have to shoulder the burden of returning the plan to full funding

alone. Also, this stop loss strategy will keep plans from relapsing into underfundedstatus during transition towards closure.

/. Close% The parado of closing or free4ing a !B pension is that it accelerates thematurity of the plan, which could then precipitate a crisis. Consequently, closure of

the !B pension needs to be to be undertaken after having completed the first twosteps above.

5. 6ell% 7nce the traditional !B pension is fro4en or closed, it will open the door forremoving the management of the plan from the sponsor. Currently, the bulk buy-out

market is the best hope for removal of the plans risks. Thanks to the contribution

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policy changes and the financial immunisation, the plan should be in good health.'ore importantly, this health should allow for a cheaper bulk buy-out as competition

in the market for closed !B pensions will ideally be fierce +if government legislationthat reinforces this is implemented.

8. &eplace% 7nce the !B pension is gone, the replacement is likely a !C type

plan.8* 2ndeed, it was conceded at our recent conference on !B pension liabilities that!C has the most traction going forward in the private sector. As mentioned earlier,however, traditional !C pensions can cause as many problems for the employee as

!B pensions cause for the employer. As such, new !C models are needed, and arebeing created. 9essons from behavioural economics have helped to increase the

effectiveness of !C pensions at preparing workers for their retirement. This caninvolve auto-enrolment, which has been proven to increase participation from 5: per

cent to ;: per cent.81,8/ 2n addition, linking increased contributions with pay raises hasproven to be an effective mechanism for increasing the rate of contributions.50 2n

addition to behavioural tricks, pooling of assets to reduce transaction costs andconsolidation of management could both improve !C efficiency. The !C plan could

also be married with a post-retirement mortality pooling plan that might providesome annuity such as benefits at low costs.85, 883inally, some are pushing for !C

pension models that use an auto-pilot mechanism that, among other things, mightadust contributions and investment policies over time, or include a phased purchase

of deferred annuities, in order to control for human errors commonly associated with!C plans.8<, 8= >hatever the shape it takes, !C, love it or hate it, is the future of

pension provision for those firms that face fierce market competition.

"lan B% 2ncremental change

2f the above solution is not feasible, then the !B pension should be changed incrementally

over time. ?ybrid pensions, which legally remain !B, can achieve neutrality with respect to

corporate structure and represent a significant improvement vis-à-vis traditional !B

pensions from the firms perspective +see section, &eality check% "ensions are epensive.Today, roughly 18 per cent of the 3ortune *000 !B sponsors have a hybrid. 80 The success of

hybrids also demonstrates why the pension debate need not be polarised between final

salary !B and noncontributory !C ( there are feasible alternatives that occupy middle

ground.

"lan C% 'ulti-employer plans

'ulti-employer pensions offer sponsors unable to implement plans A and B an alternative to

doing nothing. 3or eample, in the !C environment, these plans have been quite successful

at pooling together smaller plans into regional, industry or even national plans +see in

particular Australias superannuation scheme and the #A"3s 6uper Trusts proposal. Thesemulti-employer !C schemes reduce costs due to efficiencies and scale, all the while

maintaining a role for the employer in pension provision, an element we feel strongly about.

2deally, this concept could be applied to smaller !B plan sponsors. By gathering !B plans

that individually struggle, a redistribution of risks and costs could achieve, although not

perfectly, a sustainable pension. Although government intervention may be necessary in this

instance, particularly to renegotiate contribution and benefit levels, this sort of a plan could

use the !utch system as the model for reform.

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"lan !% #onemployer plans

As the @ Turner &eport proposed, and the @ >hite "aper on "ensions +'ay 100< has

recently endorsed, a nonemployer national programme could be an effective mechanism for

preparing people for retirement, so long as it incorporates some of the above innovative !C

characteristics. These nonemployer options are also gaining traction globally. 2n addition,Ambachtsheer8<, 8= has argued that his auto pilot plan would also work as a nonemployer

!C-type pension ( one that addresses human and governance problems typical of

employer-sponsored traditional !C schemes. >hile we agree with the premise of these

plans +improving coverage rates and decreasing firm-based risks, we do not see this as a

viable solution due to the simple fact that occupational pensions still serve a labour

management purpose. #evertheless, it is worth drawing peoples attention to the possibility.

3inal thoughts

 

The above solutions target neutrality with respect to corporate structure and are not in any

way a demonstration of our ambivalence towards employee welfare. By contrast, in

countries where labour is to become a scarce resource due to demographic challenges, in

particular >estern )urope, the @ and to some etent #orth America, pensions will be a

vital component of labour attraction, management and retention. Thus, as these shortages

approach, they reinforce the need for an effective and sustainable pension system for the

benefit of all parties.

h!!p:OO***.p#+$#e&o'$n#+s.(o"Op"O&o'$n#+O12On2O%'++O5>50045#.h!"+

201,

Tailoring Social !rotection to Small 3sland @eveloping States9 Messons Mearned from the

?aribbean('./mb pdf

Social !rotection @iscussion !aper Co. '/+>; !ublication @ate9 +G'/by 0sha #illiams, Timothy ?heston, 0line ?oudouel and Mudovic Subran

This paper e*amines the role of social protection (S! in Small 3sland @eveloping States (S3@S, giventheir particular structural, human resource and capacity constraints. The paper recommends a series ofsystemic efforts to9 (i harmoniFe S! systems and policies across the region to better respond toincreased regional mobility; (ii consolidate S! programs within countries to improve efficiency; (iii fosterkey human capital improvements among the poor to break inter"generational transmission of poverty; (ivimprove monitoring and evaluation systems and data collection capacity to facilitate more responsive S!programs; and (v increase partnerships with civil society and private sector. 0t the thematic level, the

paper recommends (i improving the responsiveness to economic and environmental shocks; (iiimproving efficiency and effectiveness of social safety net programs, in particular cash transfer programs;(iii tailoring labor market interventions to respond to constraints faced in the S3@S conte*t; and (ivreforming social insurance schemes, particularly pension schemes, to address current deficiencies andensure readiness to respond to impending ageing.

2012

!ension ?overage in Matin 0merica9 Trends and @eterminants

Social !rotection @iscussion !aper Co. '$'5; !ublication @ate9 $+'$G+

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by 8afael 8ofman and aria Maura 7liveri

This document presents an analysis of pension coverage trends in Matin 0merica for the past decades.3ts preparation involved the collection, revision, and processing of household surveys in over ' countriesin the region, spanning a period of almost 2+ years in some cases. The main goal of this document is tooffer comparable data on pension coverage among the economically active population and the elderly,considering the relevance of several demographic, social, and economic variables on these coveragelevels.

!rivate !ension Systems9 ?ross"?ountry 3nvestment !erformance

Social !rotection @iscussion !aper Co. '$'2; !ublication @ate9 $+'$G+1by 0lberto 8. usalem and 8icardo !as6uini

This study investigates the performance of private pensions systems across countries = a topic whichhas yet to be ade6uately addressed in the literature. Specifically, this study e*amines the relationshipbetween pension fund performance (as captured by gross real rates of return and the three yearstandard deviation of those returns and the structure of a countryQs private pension industry and thedesign of its pension schemes. 0 database covering $5 countries over the period '<<+"$++5 was createdfor this research.

Blobal !ension Systems and Their 8eform9 #orldwide @rivers, Trends, and ?hallenges

Social !rotection @iscussion !aper Co. '$'/; !ublication @ate9 $+'$G+1by 8obert DolFmann

 0cross the world, pension systems and their reforms are in a constant state of flu* driven by shiftingob:ectives, moving reform needs, and a changing enabling environment. The ongoing worldwide financialcrisis and the ad:ustment to an uncertain Onew normalP will make future pension systems different frompast ones. The ob:ectives of this policy review paper are threefold9 (i to briefly review recent and ongoingkey changes that are triggering reforms; (ii to outline the main reform trends across pension pillars; and(iii to identify a few areas on which the pension reform community will need to focus to make adifference.

3nternational !atterns of !ension !rovision 339 0 #orldwide 7verview of )acts and )igures

Social !rotection @iscussion !aper Co. '$''; !ublication @ate9 $+'$G+>by ontserrat !allares"iralles, ?arolina 8omero and Edward #hitehouse

This paper presents and e*plains cross country data for mandatory publicly and privately managedpension systems around the world. 8elevant #orld %ank demographic pro:ections and other indicatorspreviously reported in O3nternational !atterns of !ension !rovisionP ($+++ are updated, and relationshipsbetween key indicators are highlighted.

#orld %ank Support for !ensions and Social Security

Social !rotection @iscussion !aper Co. '$+; !ublication @ate9 $+'$G+/by ark @orfman and 8obert !alacios

!ension and social insurance programs that prevent a substantial loss in consumption resulting from old

age, disability, or death are an integral part of any social protection system. The dual ob:ectives of suchprograms are to allow for the prevention of a sharp decline in income when these life"cycle events takeplace and protection against poverty in old age. This background paper reviews the #orld %ankQsconceptual framework for the analysis of pension programs and defines the ma:or challenges facing lowand middle income countries, namely, coverage, ade6uacy and sustainability. The paper proposes abroad, forward"looking strategy to help address these challenges.

top

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2011

3nternational !ortability of Dealth"?ost ?overage9 ?oncepts and E*perience

Social !rotection @iscussion !aper Co. '''1; !ublication @ate9 $+''G+5by artin #erding and Stuart cMennan

3n this paper, full portability of health"cost coverage is taken to mean that mobile individuals can, at aminimum, find comparable continuation of coverage under a different system and that this does notimpose e*ternal costs or benefits on other members of the systems in the source and destinationcountries. %oth of these aspects needs to be addressed in a meaningful portability framework for healthsystems, as lacking or incomplete portability may not only lead to significant losses in coverage for anindividual who considers becoming mobile = which may impede mobility that is otherwise likely to bebeneficial. 3t may also lead to financial losses, or windfall gains, for sources of health"cost funding whichcan ultimately lead to a detrimental process of risk segmentation across national health systems.

!ortability of !ension, Dealth, and other Social %enefits9 )acts, ?oncepts, 3ssues

Social !rotection @iscussion !aper Co. '''+; !ublication @ate9 $+''G+1by 8obert DolFmann and Aohannes Ioettl

!ortability of social benefits across professions and countries is an increasing concern for individuals andpolicy makers. Macking or incomplete transfers of ac6uired social rights are feared to negatively impactindividual labor market decisions as well as capacity to address social risks with conse6uences foreconomic and social outcomes. The paper gives a fresh and provocative look on the internationalperspective of the topic that has so far been dominated by social policy lawyers working within theframework of bilateral agreements; the input by economists has been very limited. 3t offers an analyticalframework for portability analysis that suggests separating the risk pooling, (implicit or actual pre"fundingand redistributive elements in the benefit design and e*plores the proposed alternative approach forpensions and health care benefits. This promising approach may serve both as a substitute andcomplement to bi" and multilateral agreements.

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2009

E*"0nte ethods to 0ssess the 3mpact of Social 3nsurance !olicies on Mabor Supply with an

 0pplication to %raFilSocial !rotection @iscussion !aper Co. +<$<; !ublication @ate9 $++<G'$by @avid 0. 8obalino, Eduardo Rylbersta:n, Delio Rylbersta:n and Muis Eduardo 0fonso

This paper solves and estimates a stochastic model of optimal inter"temporal behavior to assess howchanges in the design of the unemployment benefits and pension systems in %raFil could affect savingsrates, the share of time that individuals spend outside of the formal sector, and retirement decisions.@ynamics depend on five main parameters9 preferences regarding consumption and leisure, preferencesregarding formal versus informal work, attitudes towards risks, the rate of time preference, and thedistribution of an e*ogenous shock that affects movements in and out of the social insurance system(given individual decisions. The yearly household survey is used to create a pseudo panel by age"

cohorts and estimate the :oint distribution of model parameters based on a generaliFed version of theBibbs sampler.

8ethinking Survivor %enefits

Social !rotection @iscussion !aper Co. +<$; !ublication @ate9 $++<G'$by Estelle Aames

This paper provides a framework for analyFing the efficiency and e6uity of survivor benefit programs.These programs were originally designed to support families when the main wage"earner died, in an erawhere women rarely worked, fertility rates were high, and widows were unable to support themselves

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and their children. Het, voluntary saving and insurance were often insufficient due to myopia. andatorysurvivor benefits helped to achieve lifetime consumption smoothing for the family and to prevent povertyamong elderly widowsJthe group where old age poverty is concentrated. The 6uestion isJare theseprograms still needed in an era when most women work and fertility rates have fallen and, if so, howshould they be designed

Dow uch @o Matin 0merican !ension !rograms !romise to !ay %ack

Social !rotection @iscussion !aper Co. +<$5; !ublication @ate9 $++<G'$by 0lvaro )orteFa and BuFmn 7urens

The authors present a new database of social security indicators for eleven Matin 0merican countriesdesigned to assess pension schemes in terms of the payments they promise in return to contributions.%ased on this data, the authors analyFe ine6uality, insurance and incentives to work, using thereplacement rates and the internal rates of return implicit in the flows of contributions and pensions.

#ork Distories and !ension Entitlements in 0rgentina, ?hile and Uruguay

Social !rotection @iscussion !aper Co. +<$>; !ublication @ate9 $++<G'$by 0lvaro )orteFa, 3gnacio 0pella, Eduardo )a:nFylber, ?arlos Brushka, 3anina 8ossi and BracielaSanroman

The authors propose alternative methods to pro:ect pension rights and implement them in ?hile andUruguay and partially in 0rgentina. The authors use incomplete work histories databases from the socialsecurity administrations to pro:ect entire lifetime work histories. The authors first fit linear probability andduration models of the contribution status and dynamic linear models of the income level. The authorsthen run onte ?arlo simulations to pro:ect work histories and compute pension rights. 0ccording to ourresults, significant swathes of the population would not access to fundamental pension benefits at age>1, if the current eligibility rules were strictly enforced.

3nde*ing !ensions

Social !rotection @iscussion !aper Co. +<$1; !ublication @ate9 $++<G'$by Aohn !iggott and 8enuka Sane

!ension inde*ation should anchor the parameters of the pension system to one or more economic anddemographic variables to ensure that the system is implemented in a sustainable way, while minimiFingdistortions affecting important economic choices. 0rguing that financial sustainability, incentivecompatibility and consistency across multiple government programs are critical, the authors e*amine themany linkages between the various parameters of pension schemes. )inally, the authors turn to the costof the insurance dimension of inde*ation, and suggest that option pricing techni6ues could be used toprice inde*ation guarantees, and that this approach may suggest refinements to inde*ation practice notthus far implemented.

!ension Systems for the 3nformal Sector in 0sia

Social !rotection @iscussion !aper Co. +<+/; !ublication @ate9 $++<G+/edited by Mandis acIellar 

This paper looks at the e*periences of various 0sian countries in e*panding the coverage of the pension

system to informal sector workers. The paper argues that given aging and growing informality, a rapidforward"looking response from governments in the region is necessary to provide protection against therisk of poverty in old age. This risk is particularly acute in the case of informal sector workers, as is thedifficulty of reaching them through traditional formal"sector pension approaches. )rom the analysis ofvarious case studies the paper concludes that e*panding coverage to informal sector workers throughmandatory systems is unlikely to work. 0lternative, voluntary arrangements are need. Dowever, becauseinformal sector workers tend to have lower savings capacity and high discount rates, targeted subsidiesmight be re6uired to encourage enrollment. The paper discusses some of the issues related to thedesign of these programs "" including those related to administration and the collection of contributions.3n all cases, the paper emphasiFes the need to resolve difficult tradeoffs between these transfers to

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prevent poverty during old"age and e*penditures in other social programs.

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200

3nvesting for the 7ld 0ge9 !ensions, ?hildren and Savings

Social !rotection @iscussion !aper Co. +/; !ublication @ate9 $++G'$by LincenFo Balasso, 8oberta Batti and !aola !rofeta

3n the last century most countries have e*perienced both an increase in pension spending and a declinein fertility. The authors argue that the interplay of pension generosity and development of capital marketsis crucial to understand fertility decisions. Since children have traditionally represented for parents a formof retirement saving, particularly in economies with limited or non"e*istent capital markets, an e*ogenousincrease of pension spending provides a saving technology alternative to children, thus rela*ing financial(saving constraints and reducing fertility. The authors build a simple two"period 7MB model to show thatan increase in pensions is associated with a larger decrease in fertility in countries in which individualshave less access to financial markets. ?ross"country regression analysis supports the authors4 result9 aninteraction between various measures of pension generosity and a pro*y for the development of financial

markets consistently enters the regressions positively and significantly, suggesting that in economies withlimited financial markets, children represent a (if not the only way for parents to save for old age, andthat increases in pensions amount effectively to rela*ing these constraints.

 The !erformance of Social !ensions in 3ndia9 The ?ase of 8a:asthan (/'+kb pdf

Social !rotection @iscussion !aper Co. +/2; !ublication @ate9 $++G+5by !u:a Lasudeva @utta

The Bovernment of 3ndia has recently announced a dramatic e*pansion of social pension schemes bothin terms of coverage and benefit levels. Het relatively little is known about how these programs areadministered or how well they achieve their ob:ectives. This paper assesses the performance of a socialpension scheme in the 3ndian state of 8a:asthan. 3n particular, the authors review the e*perience withrespect to program awareness, coverage, targeting and leakage as well as delivery mechanisms. Theoverall assessment is positive and holds broader lessons for social assistance in 3ndia. Thus, transactioncosts once pensions are sanctioned are low, disbursements are largely as per schedule, leakage in theform of shortfalls in benefits is generally low and satisfaction levels with the social pension scheme arehigh. 0t the same time there are clear areas for improvement on both the policy and administration side.There is evidence of under"coverage and high transaction costs associated with the application process.Though targeting is generally progressive, especially for old age and widow pensions though less so fordisability pensions, targeting is far from perfect and the eligibility criteria are not strictly enforced. There isa strong case for rela*ing, rationaliFing and clarifying some of the e*isting criteria. 7n the administrationfront, several basic issues relating to implementation need to be addressed, particularly with respect totransaction costs in the sanction of pensions, wide inter"district variations in performance within the stateand inade6uate record"keeping and monitoring.

 8eforming the !ension 8eforms9 The 8ecent 3nitiatives and 0ctions on !ensions in 0rgentina and

?hile Social !rotection @iscussion !aper Co. +/'; !ublication @ate9 $++G+1

by 8afael 8ofman, Eduardo )a:nFylber and Berman Derrera

This paper describes the recent reforms of pension policies adopted by 0rgentina and ?hile. Thestructural reforms in the '<+s and <+s were targeted on improving the long term fiscal sustainability ofthe system and their institutional design, while transferring part of the economic and social risks from theState to participants. Dowever, in recent years authorities in both countries coincided on identifyinginsufficient coverage among the elderly and ade6uacy of benefits as the most critical problems. 0s aresult of differences in political economy and institutional constraints, responses were different. 3n ?hile,a long and participatory process resulted in a large reform that focuses on impacts on the medium term,through a carefully calibrated ad:ustment. 3n 0rgentina, instead, reforms were adopted through a large

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number of successive normative corrections, with little public debate about their implications, andimmediate impacts on coverage and fiscal demands.

 #ork Distory and the 0ccess to ?ontributory !ensions in Uruguay9 Some )acts and !olicy

7ptions($5/kb pdf

Social !rotection @iscussion !aper Co. +$<; !ublication @ate9 $++G+1by arisa %ucheli, 0lvaro )orteFa and 3anina 8ossi

3ncomplete and highly fragmented work histories threaten to leave many contributors of the pensionschemes in Matin 0merica without the minimum pension guarantee or even without access to the ordinarypension. The authors propose a methodology to assess this risk, identify vulnerable groups and studypotential determinants of the history of contributions using information from the work history records ofthe social security institutions. The authors apply this methodology to the largest social security institutionof Uruguay, the %anco de !revisin Social, and show that the ma:ority of contributors to this institutionmight not comply with the minimum number of years of contribution that is currently re6uired to accessan ordinary pension when they reach the retirement age.

  0 Theory of ?ontribution @ensity and 3mplications for !ension @esign (/++kb pdf

Social !rotection @iscussion !aper Co. +$; !ublication @ate9 $++G+5

by Salvador LaldVs"!rieto

The ade6uacy of contributory pensions for the middle classes depends on density of contribution.@ensity can be far below '++ because the State is unable or unwilling to impose the mandate tocontribute on all :obs, especially on poor workers such as many in self"employment and small firms. Thepaper presents a model where individuals choose whether to bundle saving for old age in a covered :obor to save independently while choosing an uncovered :ob. The determinants of the effective rate ofreturn offered by the contributory pension plan include the earnings differential. This return is thencompared with the returns offered by pure saving in the financial market, to determine the e6uilibriumdensity of contribution. The paper also applies the model to assess two standard designs fornoncontributory subsidies for the old poor. 3t finds that these standard designs crowd out contributorypensions for the middle classes by reducing density. The paper also considers two second"generationdesigns for noncontributory subsidies and other approaches to raise density. This model also allowsoptimiFation of the combined OmultipillarP structure, where participants get noncontributory pensions andalso contributory pensions based on both mandates and fiscal incentives.

 7n the )inancial Sustainability of Earnings"8elated !ension Schemes #ith O!ay"0s"Hou"BoP

)inancing (><5kb pdfSocial !rotection @iscussion !aper Co. +$5; !ublication @ate9 $++G+5by @avid 0. 8obalino and 0ndrs %odor 

3n this paper the authors review the characteriFation of the sustainable rate of return of an earnings"related pension system with pay"as"you"go financing. The authors show that current pro*ies for thesustainable rate, including the Swedish OgyroscopeP, are not stable and propose an alternative measurethat depends on the growth of the buffer"stock and the pay"as"you"go asset. Using a simple one"sectormacroeconomic model that embeds a notional account pension system the authors test how the differentpro*ies perform in the presence of various macroeconomic and demographic shocks. The authors findthat the new formula proposed in this paper is the most stable. 3t avoids the accumulation of assets

without bound (which penaliFes workers while always ensuring a positive buffer fund.

  0n E*"0nte Evaluation of the 3mpact of Social 3nsurance !olicies on Mabor Supply in %raFil9 The ?ase

for E*plicit over 3mplicit 8edistribution Social !rotection @iscussion !aper Co. +$>; !ublication @ate9 $++G+5by @avid 0. 8obalino, Eduardo Rylbersta:n, Delio Rylbersta:n and Muis Eduardo 0fonso

This paper solves and estimates a stochastic model of optimal inter"temporal behavior to assess howchanges in the design of the income protection and pension systems in %raFil could affect savings rates,the share of time that individuals spend outside of the formal sector, and retirement decisions. @ynamics

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depend on five main parameters9 preferences regarding consumption and leisure, preferences regardingformal vs. informal work,attitudes towards risks, the rate of time preference, and the distributions of twoe*ogenous shocks that affect movements in and out of the social security system (independently ofindividual decisions.

 The !ortability of !ension 8ights9 Beneral !rincipals and the ?aribbean ?ase

Social !rotection @iscussion !aper Co. +$1; !ublication @ate9 $++G+1by 0lvaro )orteFa

The portability of pension rights is an increasingly important issue in the ?aribbean. The large andincreasing flows of migrant workers, including both permanent and temporary migrants, the small siFe ofthe domestic economies and the process of regional integration and economic openness call for effectivemeans to make pensions portable. This document presents a select survey of the literature on pensionportability and reviews the progress made by the ?aribbean countries as well as some remainingchallenges in the light of the international e*perience.

 !ension Systems and 8eform ?onceptual )ramework

Social !rotection @iscussion !aper Co. +$2; !ublication @ate9 $++G+>by 8obert DolFmann, 8ichard !aul DinF and ark @orfman

The #orld %ankQs conceptual framework to assess pension systems and reform options evaluates initialconditions and the capacity to improve the enabling environment, then focuses on how best to workwithin these to achieve the core ob:ectives of pension systems " protection against the risk of poverty inold age and smoothing consumption from oneQs work life into retirement. The %ank applies a multi"pillared approach towards pension system modalities to address the needs of target populationsincluding9 (i a non"contributory OFero pillarP e*tending some level of old"age income security to all of theelderly; (ii an appropriately siFed mandatory Ofirst pillarP with the ob:ective of replacing some portion oflifetime pre"retirement income through contributions linked to earnings; (iii a funded mandatory defined"contribution Osecond pillarP that typically provides privately"managed individual savings accounts; (iv afunded voluntary Othird"pillar;P and (v a non"financial Ofourth pillar.P The primary evaluation criteria are theability of the system to maintain ade6uacy, affordability, sustainability, e6uity, predictability androbustness. The secondary evaluation criteria are the systemQs capacity to9 minimiFe labor marketdistortions; contribute to savings mobiliFation; and contribute to financial market development. %ecausepension benefits are claims against future economic output, it is essential that over time pension systemscontribute to growth and output to support the promised benefits. Boing forward, the %ank is focusing onstrengthening its support in9 (a establishing a clearer results framework to assess pension systems andreforms; (b enhancing knowledge management, including research and learning; and (c improvingimplementation capacity.

!ension Mending and 0nalytical #ork at the #orld %ank9 )H$++$"$++5

Social !rotection @iscussion !aper Co. +''; !ublication @ate9 $++G+1by 8ichard DinF, elike EgelmelFer and Sergei %iletsky

This paper presents an overview of the #orld %ankQs lending and knowledge building activities that haveimproved pension systems in client countries during the past two decades. The ob:ectives of this reportare9 ' to describe the policy framework that has guided the %ankQs work on pension related issues and$ to present relevant information about the nature and e*tent of the %ankQs lending and policy advisory

work in this area and / to discuss some of the results that have been achieved through this work as wellas future policy directions.

 @isability 3nsurance with !re"funding and !rivate !articipation9 The ?hilean odel

Social !rotection @iscussion !aper Co. +5'<; !ublication @ate9 $++G+'by Estelle Aames, 0ugusto 3glesias and 0le:andra ?o* Edwards

The disability insurance system in ?hile is much less well"known than the pension part, but it is e6uallyinnovative. 3t differs from traditional public disability insurance in two important ways9 ' it is largely pre"funded " through the accumulation in the retirement account and later through an additional payment

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made when the person becomes permanently disabled, sufficient to cover a lifetime defined benefitannuity; and $ the disability assessment procedure includes participation by private pension funds(0)!s and insurance companies, who finance the benefit and have a direct pecuniary interest incontrolling costs. SurvivorsQ insurance is handled in the same way, through a combined @WS fee. theauthors argue that pre"funding will raise disability fees in the early years of a new system as funds arebuilt up but reduce them in the long run as benefits are covered out of accumulated funds. the authors

further hypothesiFe that the participation of private pension funds in the assessment procedure will keepsystem costs low, by cutting the incidence of successful disability claims. )inally, the authors e*pect thatthese incentives will also lead to cost"shifting " to other 0)!Qs by selection and to the public treasury viathe minimum pension guarantee (!B. Using simulations based on a special data set that was providedto us by the 0ssociation of 0)!s and applying the ?o* proportional haFard model to a retrospectivesample of new and old system affiliates (ES! $++$, the authors conclude that these hypotheses arebroadly consistent with observed behavior.

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2007

The Mife"?ourse !erspective and Social !olicies9 0n 3ssues Cote

Social !rotection @iscussion !aper Co. +5'<; !ublication @ate9 $++5G''by 0.M. %ovenberg

 0 number of trends are changing the nature of social risks and increase the importance of human capital,adaptability and fle*ibility. This paper discusses the usefulness of a life"course perspective in developingproactive social policies that better fit the changing life cycles of individuals who combine formal workwith other activities on transitional labor markets. 3t pays special attention to the accumulation andmaintenance of human capital over the life course and stresses that reconciliation of work and familygoes beyond child"care facilities and parental leave, and involves the entire life course. 3n particular,longer and deeper involvement in paid employment allows people to e*ploit their longer life to reconcilethe two ambitions of, first, investing in the ne*t generation as a parent and, second, pursuing a fulfillingcareer in paid work in which one keeps learning. Breater fle*ibility of working time over the life coursere6uires more individual responsibility for financing leave. oreover, rather than shielding older insidersthrough employment protection, labor"market institutions should enable parents of young children toeasily enter and remain in the labor market. )inally, more activating social assistance and in"workbenefits should replace the passive income support for breadwinners that results in high minimum"wagefloors.

 The Iosovo !ension 8eform9 0chievements and Messons

Social !rotection @iscussion !aper Co. +5+5; !ublication @ate9 $++5G+2by Aohn Bubbels, @avid Snelbecker and Mena ReFulin

This paper tells the story of the Iosovo reform and draws policy and implementation lessons from thee*perience. The paper discusses policy issues and implementation e*perience in great detail, to serve asa resource for others interested in various aspects of the Iosovo reform. 8eaders who want tounderstand an overview of the reform and key lessons drawn from the e*perience may wish to turnimmediately to9 Section 33.$, which presents an overview of the three pillars; Sections 333.5 and 3L.',which present the specific challenges confronted in implementing !illars 3 and 33, respectively; and

Section L3, which summariFes the lessons learned about policy and implementation issues from theIosovo reform e*perience.

 0ging and @emographic ?hange in European Societies9 ain Trends and 0lternative !olicy 7ptions 

Social !rotection @iscussion !aper Co. +5+/; !ublication @ate9 $++5G+/by 8ainer uenF

This paper gives an overview on current demographic trends and pro:ected population change in Europeand neighboring regions. The main focus of the analysis is on #estern and ?entral Europe. Today thisworld region has a total population of 1++ million. 0vailable forecasts until the year $+1+ pro:ect a decline

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of the population at working age, a subse6uent decline of the (native work force and a parallel increasein the number of retired people. The paper discusses policy options by demonstrating the impact ofpossible changes in labor force participation, higher retirement age and pro"active recruitment of migrantlabor on population siFe and future labor force.

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200

 0n 0ssessment of 8eform 7ptions for the !ublic Service !ension )und in Uganda

#orld %ank !olicy 8esearch #orking !aper 2+<', $++>G'$by Tatyana %ogomolova, Bregorio 3mpavido and ontserrat !allares"iralles

This paper analyFes the future liabilities that the Ugandan !ublic Service !ensions )und mightaccumulate under the provisions of ?0! $>, unless it is reformed. 3t then discusses alternative reformoptions that can be used as input in designing an educated homegrown reform of the fund. The papersupports a hybrid (two"pillar reform option composed by a small defined benefit scheme and acomplementary defined contribution scheme, instead of a pure defined contribution (monopillar reformoption discussed by policymakers in the country. The main reason for this is related to the fact that hybrid

and pure defined contribution reforms will have the same impact on reducing pension e*penditure (forsame grandfathering rules and surplus in the first pillar. 3n addition, everything else being e6ual, thehybrid reform is likely to produce higher average replacement rates due to the redistributive and poolingproperties of the small @% pillar.

!ension Systems in Matin 0merica9 ?oncepts and easurements of ?overage

 0lso available in Spanish " This version is dated $++>G''Social !rotection @iscussion !aper Co. +>'>; !ublication @ate9 $++G'+by 8afael 8ofman and Meonardo Mucchetti

This paper presents a new stage in the efforts by the authors to produce a reliable estimation of coverageindicators in the region. This pro:ect started in $++2"+1 with the analysis of a coverage data for a smallergroup of countries around $++$ (8ofman and ?arranFa, $++1, as was significantly revised ande*panded, to include time series beginning in the mid '<<+s in $++>"+5. This version presents a newe*pansion in the time series of indicators, going now from '<<+ to $++>, and included additionalcountries in the region. 7f course, the data still present gaps, and comparability problems originated ondifferences in the sources are still present, as e*plained in the methodological anne*.

The 8elative erits of Skilled and Unskilled igration, Temporary and !ermanent Mabor igration, and

!ortability of Social Security %enefitsSocial !rotection @iscussion !aper Co. +>'2; !ublication @ate9 $++>G''by Aohannes Ioettl under guidance of and with input from 8obert DolFmann and Stefano Scarpetta

3n arch $++>, the B"$+ established a study group on labor mobility and demographics. The #orld%ankQs Social !rotection and Mabor unit (D@CS! was asked to provide an issues paper on the relativemerits of skilled and unskilled migration, temporary and permanent labor migration, and portability ofsocial security benefits. The ob:ective of this paper is9 (i to highlight the relative merits of skilled and

unskilled migration for both source and destination countries; (ii to highlight the relative merits oftemporary and permanent migration for source and destination countries; and (iii to highlight the costsand benefits of enhanced portability of social security benefits and its impact on incentives for migrantsand migration outcomes.

 ?omparing 3ndividual 8etirement 0ccounts in 0sia9 Singapore, Thailand, Dong Iong and !8?

Social !rotection @iscussion !aper Co. +>+<; !ublication @ate9 $++>G+<by Hasue !ai

This paper compares the different approaches of Singapore, Thailand, Dong Iong, and ?hina with

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respect to how they manage their respective defined contribution, individual retirement account systems.The four cases illustrate important differences in terms of some of the key issues in design of @?schemes; the role of government versus private sector, investment policy and individual choice, amongothers. They also provide a useful contrast in terms of initial conditions.

 !ension System 8eforms

!ension System 8eformsSocial !rotection @iscussion !aper Co. +>+; !ublication @ate9 $++>G+<by 0nita SchwarF

3n typical pension systems, individuals are asked to make contributions and based on the number ofcontributions made and the level of those contributions, a pension is awarded. ?ontributions fromworkers generally finance these pensions. Since higher income individuals tend to make more fre6uentcontributions due to a more stable work history and higher contributions based on their higher wages,pension e*penditures are naturally skewed toward those who paid for them, the higher incomeindividuals. The normal tools for poverty and social impact analysis are often not applicable given thecontributory nature of the systems. The paper looks at these issues, provides a framework in which toview pension reforms, and provides some pension"specific tools which do allow a sensible poverty andsocial impact analysis to take place.

 ?ivil"service !ension Schemes 0round the #orld (2/+kb pdf

Social !rotection @iscussion !aper Co. +>+$; !ublication @ate9 $++>G+1by 8obert !alacios and Edward #hitehouse

There are separate pension schemes for civil servants in about half of the worldQs countries, includingsome of the largest developing economies, such as %raFil, ?hina and 3ndia. 3n the higher"income, 7E?@countries, spending on pensions for public"sector workers makes up one 6uarter of total pensionspending. 3n less developed countries, this proportion is usually higher. Het, very little has been written onthe design and reform of civil"service pension plans, especially when compared with the voluminousliterature on national pension programs.

This paper compares civil service pension schemes across countries in terms of benefit provision andcost. The authors find that in many developing countries, these e*penditures are a greater fiscal burden

than in higher income countries where the ta* base is larger. The paper also compares schemes withinthe same country covering private sector workers. )inally, the authors review key policy issues related topension schemes covering civil servants as well as other public sector workers. 3n particular, the authorsfind that there is little :ustification for maintaining parallel schemes in the long run.

 Social !ensions !art 39 Their 8ole in the 7verall !ension System 

Social !rotection @iscussion !aper Co. +>+'; !ublication @ate9 $++>G+1by 8obert !alacios and 7leksiy Sluchynsky

?ash transfers for the elderly with little or no link to previous contribution or work history are employed inmany countries to provide income support for the elderly. 3n the conte*t of the larger debate over pensionreform, some argue that these Xsocial pensionsQ are an effective way to deal with chronically lowcoverage of contributory schemes and to alleviate poverty among the elderly. This paper reviews theglobal e*perience with social pensions. The authors find that coverage and cost of these programs varies

widely and that the appropriate role for social pensions should take into account several country"specificconditions. The e*tent of coverage of the contributory scheme, the e*tent of other social assistanceprograms and the relative poverty status of the elderly are among the factors that should be considered.@esign and implementation issues will be reviewed in !art 33.

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2005

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 AapanQs !ension 8eform (>>>kb pdf

Social !rotection @iscussion !aper Co. +12'; !ublication @ate9 $++1G'$by Aunichi Sakamoto

8apid population ageing has led to repeated ad:ustments to the parameters of AapanQs public pension

scheme over the last decade all aimed at achieving long run financial balance. The most recent attempt,describe in this paper, introduces an ad:ustment mechanism that links future benefit levels to theunderlying determinants of the schemeQs finances. This mechanism is similar to those recently introducedin Bermany and, to a lesser e*tent, in Sweden and fundamentally alters the concept of the XdefinedbenefitQ. ?hanges to how pension reserves are invested are also described. )inally, the benefit reductionsin the public scheme and recent regulatory changes suggest an increased future role for complementaryprivate provision.

 The Cew !ensions in IaFakhstan9 ?hallenges in aking the Transition

Social !rotection @iscussion !aper Co. +1/5; !ublication @ate9 $++1G+<by 8ichard !. DinF, 0sta Rviniene and 0nna"arie Lilamovska

3n Aune of '<<5 IaFakhstan embarked on a dramatic reform of its pension system, replacing theinherited pay as you go regime with one based entirely on fully funded individual accounts. The paper

provides pro:ections of the effects of this reform on income replacement rates and considers somepossible ad:ustments to the system design, including those enacted in early $++1, that could address thepro:ected outcomes of the reform. The initial reform which did not include any minimum pensionguarantee is pro:ected to result in a significant reduction in the individual income replacement ratesderived from the pension system, especially for women. #hen the reform was mature and the old systemfully phased out, women are pro:ected to have received pensions at level of less than '1 percent of theirpre"retirement earnings. Larious potential ad:ustments to the reform, including the recent introduction ofa citiFens pension or demogrant, are found to have the capacity to significantly raise these incomereplacement rates. The fiscal costs of alternatives are found to vary considerably due significantly to thedegree to which they would target e*penditures to lower income groups. The analysis of the originalreform design and possible ad:ustments provides some useful lessons about the design of individualaccount systems in transition economies.

 !ension Supervision9 Understanding 3nternational !ractice and ?ountry ?onte*t

Social !rotection @iscussion !aper Co. +1$2; !ublication @ate9 $++1G+1by 8ichard !. DinF and 0nca ataoanu

This paper proposes an approach to classifying and measuring the primary elements of private pensionsupervision and undertakes an evaluation using a representative set of countries. The analysis considershow supervision methods and style relate to the basic design of pension systems and the broaderenvironment in which they operate. Supervisory systems are shown to include si* main elements, withconsiderable variation among systems in the scope and intensity of activities within each element. Theanalysis concludes that there are discernible relationships between supervisory methods and the conte*tin which they are applied. The level of economic development, depth of capital markets, underlying legalframework presence of mandates, and number of funds supervised are found to be associated withdepth and intensity of supervision activities. These findings support the principle that the organiFation andmanagement of private pension supervision is significantly derived from the conte*t and environment inwhich these systems operate.

 Social Security ?overage in Matin 0merica

Social !rotection @iscussion !aper Co. +1$/; !ublication @ate9 $++1G+1by 8afael 8ofman

The debate on social security coverage has been complicated by a lack of consistent 6uantitativeinformation that would allow for rigorous comparisons of different countries and different time spans. 0lthough many recently published articles and opinions include statistics, their sources and calculationsmethodology are not always clear. )or that reason, the publication of coverage information in a significantnumber of the regionQs countries, calculated simultaneously and based on similar data, makes an

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important contribution to clarifying the debate and developing specific proposals for problem solving.

 0ging and !overty in 0frica and the 8ole of Social !ensions

Social !rotection @iscussion !aper Co. +1$'; !ublication @ate9 $++1G+1by Canak Iakwani and Ialanidhi Subbarao (online only

3n many low income 0frican countries, three factors are placing an undue burden on the elderly. )irst, theburden on the elderly has enormously increased with the increase in mortality of prime age adults due toD3L 03@S pandemic and regional conflicts. Second, the traditional safety net of the e*tended family hasbecome ineffective and unreliable for the elderly. Third, in a few countries, the elderly are called upon toshoulder the responsibility of the family as they became the principal breadwinners and caregivers foryoung children. #hile a number of studies have e*amined the welfare conse6uences of thesedevelopments on children, few studies have systematically analyFed the poverty situation among theelderly (relative to other groups in low income countries 0frica, and the role of social pensions. Thisstudy aims to fill this gap.

!ortability 8egimes of !ension and Dealth ?are %enefits for 3nternational igrants9 0n 0nalysis of

3ssues and Bood !ractices. 0lso available in )rench.Social !rotection @iscussion !aper Co. +1'<; !ublication @ate9 $++1G+1by 8obert DolFmann, Aohannes Ioettl, and Taras ?hernetsky

The paper provides a first investigation into the portability of pension and health care benefits forinternational migrants. 3t is based on available literature and newly minted data, but more importantly onselective case studies from main migrant"sending and receiving countries. #hile e*ploratory, the paperachieves a better understanding of the realities on the ground and is able to distill key issues as well asidentify good and best practices. The main conclusions include the following9 )irst, only around $+percent of migrants worldwide work in host countries where full portability of pension benefits, but notnecessarily of health care benefits, to their home countries is ensured. Second, bilateral agreements areseemingly the current best practice to ensure portability for pension and health care benefits, although for the latter this is not always the case. Third, more actuarial"type structures should help to enhanceportability. This is, in principle, straightforward for pensions and a defined contribution"type design. 3t ismuch more complicated for health care benefits. Mast but not least, for improved benefit design andimplementation, the information base needs to be broadened, including through more country casestudies and tracer studies of migrants.

 !ension 8eform in El Salvador 

Social !rotection @iscussion !aper Co. +1+5; !ublication @ate9 $++1G+2by 8odrigo 0cuYa

El Salvador implemented a systemic pension reform in '<<. The publicly"managed, defined benefit andunfunded pension schemes for formal sector workers were replaced by a privately"managed schemewith individual accounts. The e*perience during the first five years of the reform has been marred byproblems related to the valuation of accrued rights in the old scheme and government intervention. Thereare also growing concerns about market concentration in a country where only two pension fundmanagers compete in a system which is mandatory for all formal sector workers. The case of El Salvador raises the 6uestion as to whether a small country with limited governance capacity can succeed with thisreform model.

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200/

 Safety Cets for the Elderly in !oor ?ountries9 The ?ase of Cepal (/''kb pdf

!ublication @ate9 $++2G+1, %3 - 46S6 %$ $3 C36by 8obert A. !alacios and S. 3rudaya 8a:an

?ash transfer programs specifically targeted toward the elderly can be divided into demogrant and

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means"tested schemes. The latter apply some test of need while demogrants are paid to all citiFens thatreach a particular age. #hile means"tested programs are fairly common, there are only about a doFene*amples of the demogrant or universal flat pensions. Cepal is one of the few low income countries andthe only South 0sian country with a demogrant. 3n principle, it pays a modest pension to all CepalesecitiFens age 51 and over. There is also a means"tested pension for widows over age >+. This paperanalyFes the safety net for the elderly in Cepal through its first nine years of operation at the national,

regional and local levels. The preliminary conclusions are that (i current and pro:ected spending ismodest due to low benefits and a high eligibility age; (ii while around three"fourths of the eligiblepopulation receives the benefit, there are significant differences across Cepal4s 51 districts; (iii theresults of a special (albeit unrepresentative survey suggest that transaction costs and corruption areminimal and (iv the reliance on Lillage @evelopment ?ommittees (L@?s to administer the scheme mayallow for significant variation in the efficacy of implementation. The future role of the demogrant should bedetermined as part of a coherent overall pension policy.

Toward a 8eformed and ?oordinated !ension System in Europe9 8ationale and !otential Structure

Social !rotection @iscussion !aper Co. +2+5; !ublication @ate9 $++2G+2by 8obert DolFmann

The need for a rapid and comprehensive reform of the pension systems in most current and futuremember countries of the European Union is increasingly acknowledged by individuals and politicians.

Cational efforts can now draw support on intensified EU cooperation which is based on the 7pen ethodfor ?oordination. Het, this method takes the diversity of European pension design as a given, and muchof the reform debate is still limited to fiscal issues at national levels. This paper (i reviews the reformneeds of the pension systems for fiscal, economic and social reasons; (ii makes the case for a movetoward a more coordinated pension system in Europe; and (iii sketches how such a system may looklike and come about. The central claim of the paper is that a multi"pillar system, with a non"financial (ornotional defined contribution (C@? system at its core, and coordinated supplementary funded pensionsand social pensions at its wings is an ideal approach to deal with diverse fiscal and social reform needs.The approach would also introduce a harmoniFed structure while allowing for country"specificpreferences with regard to coverage and contribution rate. Such a reform approach may lead to a !an"European reform movement as a number of countries did or plan to introduce C@?s, and others mayeasily convert their point system into an C@? structure.

 3mplicit !ension @ebt9 3ssues, easurement and Scope in 3nternational !erspectiveSocial !rotection @iscussion !aper Co. +2+/; !ublication @ate9 $++2G+/by 8obert DolFmann, 8obert !alacios and 0sta Rviniene

This paper argues that it is important to take into account unfunded public pension liabilities as part of anassessment of the overall fiscal situation, including the fiscal positions of pension schemes pre and postreforms. 3t e*amines the concept of the implicit pension debt (3!@ and presents estimates for /1 low andmiddle income countries based on a consistent methodology and assumptions. The policy conclusionsstress the need for standardiFed international reporting of this indicator.

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200,

 !ension 8eform in the @ominican 8epublic

Social !rotection @iscussion !aper Co. +/$>; !ublication @ate9 $++/G'$by 8obert A. !alacios

 0rguably, the most important public policy initiative under way today in the @ominican 8epublic is thereform of its social security programs. The reform is taking place in the conte*t of an economic crisis thatwill make a comple* implementation process even more difficult in the first few years. 3n the longer run,the complete overhaul of the health and pension systems will have a ma:or impact beyond social policy. 3twill affect labor markets, fiscal policy and even financial markets. 3n terms of the country4s economicdevelopment, much is at stake. This paper describes the systemic pension reform introduced by

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legislation in $++' but implemented only in mid"$++/.

 @isability !ensions and Social Security 8eform9 0nalysis of the Matin 0merican E*perience

Social !rotection @iscussion !aper Co. +/$1; !ublication @ate9 $++/G'$by ?arlos 7. Brushka and Bustavo @emarco

This paper describes the disability pension arrangements prevailing in ten Matin 0merican countries thatreformed their pension systems. The analysis is limited to the topic of disability pensions, withoutattempting to evaluate other critical aspects such as the available infrastructure9 handicapped accessgenerally (ramps, blind cues, medical and nursing support, home care, and so on. The relativesignificance of disability pensions is highly dependant on these factors and, however, they are reallylimited in most countries of Matin 0merica.

 Bovernance of !ublic !ension )unds9 Cew Realand Superannuation )und ($'kb pdf

!ublication @ate9 $++/G+1by %rian c?ulloch and Aane )rances

 0fter briefly reviewing the conte*t behind the policy and the policy ob:ective, this paper e*amines theresulting key design elements of the governance framework for the Cew Realand Superannuation )und

that attend to each element of that ob:ective9 clearly defining the )und, placing an appropriate level ofindependence around the governing body, providing e*plicit legislated commercial investment ob:ectives,and establishing a robust accountability framework. )inally, the paper briefly reviews the e*perience ofimplementation to date, and also summariFes the arrangements surrounding the governance of otherportfolios of financial assets owned by the ?rown in Cew Realand.

  0geing and !ensions in the Euro 0rea9 Survey and !ro:ection 8esults

Social !rotection @iscussion !aper Co. +/+5; !ublication @ate9 $++/G+/by !. ?. 8other, . ?atenaro and B. Schwab

!opulation ageing will impose a significant burden on European fiscal balances, in particular throughpay"as"you"go pension systems. This study presents an independent estimate of this burden for the euroarea and 6uantifies the impact of two reform scenarios. %ased on widely used but optimisticassumptions, the present value of future pension deficits through $+1+ is estimated at 1' of B@!,

adding to the current average e*plicit debt stock of around >5 of B@!. 3n this calculation, the deficitscurrently incurred by many pension systems as revenues fall short of e*penditures are not included.Liable parametric reforms represent no durable solution to alleviate the burden sufficiently, as they canbalance pension systems at best temporarily. 0 comprehensive reform, including reforms of currentsystems and a move towards partial funding, is found to ensure permanent financial viability of the publicpension system.

 !ension 8eform in ?roatiaSocial !rotection @iscussion !aper Co. +/+2; !ublication @ate9 $++/G+$by Roran 0nusic, !hilip 74Ieefe and San:a adFarevic"Su:ster 

?roatia4s transition toward independence and the market economy in the '<<+s e*acerbated problems inthe !0HB @% system and ultimately led to its financial collapse. 0lthough a comprehensive three"pillarreform was initiated in late '<<1, implementation of the reform only began in '<< with an overhaul of!0HB parameters, including shifting to a Berman"style points system. 3ntroduction of the mandatory and

voluntary funded pillars was announced in '<< and implemented in $++$. The new system includes aprivately"managed individual account scheme with a contribution rate of 1 percent in addition to adownsiFed pay"as"you"go, defined benefit component. This paper describes the design of the newsystem and highlights areas where further refinements are needed.

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2002

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 anaging !ublic !ension 8eserves !art 339 Messons from )ive 8ecent 7E?@ 3nitiatives

Social !rotection @iscussion !aper Co. +$'<; !ublication @ate9 $++$G+5by 8obert A. !alacios

 0 large number of public pension schemes around the world have accumulated significant reserves.!refunding might reduce the risk that future governments will not be able to meet pension obligations.

The management of these funds therefore, has a direct effect on financial sustainability and potentialbenefit levels. 3t also has important indirect effects on the overall economy, especially when the funds arelarge relative to domestic capital markets. 3n the past, most public pension funds have not been investedeffectively, largely because of political interference. This paper reviews strategies for limiting risks thatarise when a public entity is entrusted with managing national pension savings. 3n particular, an attemptis made to draw lessons from recent reforms in five 7E?@ countries.

?Fech !ension System9 ?hallenges and 8eform 7ptionsSocial !rotection @iscussion !aper Co. +$'5; !ublication @ate9 $++$G+>by EsperanFa Masagabaster, 8oberto 8ocha and !atrick #iese

The purpose of the paper is to review the structure and performance of the ?Fech pension system ande*amine alternative reform options. The paper shows that in the absence of reform the deficits of the?Fech pension system may e*ceed percent of B@! in $+1+. To contain these deficits the paper e*plore

two ma:or !0HB reform options. The first ma:or option is a standard parametric reform that preserves thedefined benefit (@% scheme. The second ma:or option involves parametric reforms combined with aswitch to a notional defined contribution (C@? scheme. The paper shows that the C@? cum parametricreforms would automatically tighten the link between contributions and benefits and be more resilient tounpredicted demographic shocks. Dowever, both the @% and the C@? options would produce asignificant reduction in replacement rates, especially for young generations. To avoid an e*cessive dropin replacement ratios the authorities should make an effort to increase coverage of the third pillar andimprove the regulatory framework for third pillar funds. The authorities may also have to considerintroducing a second pillar to ensure universal coverage, especially of young workers. 3ntroducing asecond pillar will be easier if the !0HB reforms start immediately. This is because an earlyimplementation of the !0HB reforms would produce a significant improvement of the !0HB and offset atleast partly the revenue losses arising from the diversion of contributions to the second pillar.

 The 8eformed !ension Systems in Matin 0merica ($>$kb pdf

Social !rotection @iscussion !aper Co. +$+<; !ublication @ate9 $++$G+1

by AosV E. @evesa"?arpio and ?arlos Lidal"eli

The transformation of the public pension system in ?hile, which has served as a model for later reformscarried out in other Matin 0merican countries, has attracted the attention of many researchers. The aim of this paper is to make a (provisional technical assessment of the functioning of these systems. Theoperating structure is described and the main characteristics are analyFed. ain indicators are discussedincluding rates of return, level of pensions provided, actual coverage, administration costs, siFe andcomposition of fund portfolios, level of implicit pension debt, transition costs, and the problems arisingdue to the e*istence of alternative methods of pensions provision.

 andatory 0nnuity @esign in @eveloping EconomiesSocial !rotection @iscussion !aper Co. +$+; !ublication @ate9 $++$G+1by SuFanne @oyle and Aohn !iggott

!ension policy has become one of the more volatile areas of economic reform in recent years. The onset

of demographic transition, combined with concerns about the efficiency effects of a large public sector,has prompted a search for pension reform options that reduce governments4 responsibility for directfinancial support for the retired. This process is common to developing and developed economies alike.This paper e*plores the appropriate development of policy towards mandatory retirement"incomestreams within this broad framework, paying particular attention to the economic environments relevantto developing economies.

 !ension 8eform and ?apital arkets9 0re There 0ny (Dard MinksSocial !rotection @iscussion !aper Co. +$+'; !ublication @ate9 $++$G+$by Eduardo #alker and )ernando Mefort

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The creation of fully funded, privately managed pension systems may have significant positive directeffects on savings, growth, and welfare. Dowever, the indirect link, via capital market development, maybe as important. This hypothesis is verified with evidence from emerging economies that have recentlyengaged in such reforms with a focus on ?hile, 0rgentina and !eru. There is abundant 6ualitative andanecdotal evidence that relates pension reform with the accumulation of institutional capital, with thee*istence of an adaptive legal framework, with increased specialiFation, transparency and integrity and

even with better corporate governance. Evidence of increased financial innovation is also found whilethere is little evidence of bank disintermediation. 3n addition, time"series and panel data evidence isgenerally consistent with the following hypothetical effects9 a reduction in the cost of capital; lowersecurity"price volatility; and higher traded volumes. The evidence suggests that the indirect channel viacapital market development may have important implications for economic growth and productivity.

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2001

 ?hile4s !ension 8eform 0fter $+ Hears

Social !rotection @iscussion !aper Co. +'$<; !ublication @ate9 $++'G'$by 8odrigo 0cuYa 8. and 0ugusto 3glesias !.

The aim of this paper is to describe the '<+ ?hilean pension reform and to present its main results andeconomic impact. 3t is mainly descriptive; however the authors have tried to emphasiFe the lessons thatmay be learned and that may be of interest to other countries in different circumstances. 3n particular, theauthors focus on potential areas for regulatory improvements. 3n Section 33, a brief description of the 0)!system and its place within ?hile4s social security system is presented. 0lso, the main characteristics ofthe transition from the old to the new system are sketched, together with the main changes in regulationafter '<+. Section 333 includes a history of pension reform in ?hile along with an analysis of thecircumstances which may e*plain why the country decided to introduce such a radical reform. 3n Section3L, the performance of the 0)! system is summariFed. 3n Section L, the main economic effects ofpension reform are discussed. Section L3 presents the authors4 view regarding future development in theregulation of the 0)! system. The paper concludes with some comments on the timing of possibleregulatory changes.

Benerational 0ccounting and Dungarian !ension 8eform (<>kb pdf

Social !rotection @iscussion !aper Co. +'$5; !ublication @ate9 $++'G'+by 8bert 3. Bl, 0ndrs Simonovits and BVFa Tarcali

The essence of generational accounting is to break down total net contributions in a given year to eachcohort and to pro:ect this profile into the future. Using additional assumptions on the discount rate andthe growth of productivity and population, the per capita net contribution of future generations can bedetermined, which satisfies the inter"temporal budget constraint. Benerational accounts in the Dungarianpension system show that the '<<5 reform package significantly reduced the financial tension generatedby demographic and institutional factors. The main source of improvement was a rationaliFation of socialsecurity. These conclusions are robust. Cevertheless, future imbalances depend on the dynamics ofmodel parameters, primarily the rate of productivity growth.

3ndividual 0ccounts as Social 3nsurance9 0 #orld %ank !erspectiveSocial !rotection @iscussion !aper Co. +''2; !ublication @ate9 $++'G+>by 8obert DolFmann and 8obert !alacios

The trend toward including individual accounts as part of the mandatory pension system continuesunabated. Cine Matin 0merican countries have introduced individual accounts (?hile, !eru, 0rgentina,?olombia, Uruguay, %olivia, e*ico, El Salvador and Cicaragua and several more are preparing to do so(Ecuador, @ominican 8epublic. 0 similar trend has emerged in Europe where the former socialistcountries are taking the lead9 Dungary, IaFakhstan, Matvia and !oland have already passed reformlegislation and many others including ?roatia, Estonia, acedonia, 8omania and the Ukraine arepreparing their own versions. There is also movement in this direction in #estern Europe, even incountries with large, state defined benefit plans like Sweden. Several 0sian versions of the individualaccounts strategy are also emerging, ranging from the gradually liberaliFation of Singapore4s ?entral

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!rovident )und to Dong Iong4s new, employer based, defined contribution scheme. 3n fact, reforms thatassign an important role to individual accounts are being discussed in doFens of countries in every regionof the world. This brief note states the broad arguments for individual accounts. The structure of thepaper is as follows9 Section 33 provides some needed clarification on individual accounts, Section 333outlines the main arguments for individual accounts while Section 3L concludes.

 0ustralia4s andatory 8etirement Saving !olicy9 0 Liew from the Cew illenniumSocial !rotection @iscussion !aper Co. +'+; !ublication @ate9 $++'G+/by DaFel %ateman and Aohn !iggott

)ormal retirement income provision in 0ustralia can be traced back to occupational superannuationschemes first offered by banks and state governments in the '<th century. Dowever, the year '<+< marksthe beginning of a national retirement income policy with the introduction of a means"tested age pension.Since then retirement income provision has evolved into a multi pillar arrangement comprising the 0ge!ension, occupational superannuation and other long term saving through property, shares andmanaged funds. The '<<+s saw the introduction of private mandatory retirement saving in the form of theSuperannuation Buarantee. #ith the introduction of the Superannuation Buarantee, 0ustralia :oined agrowing group of countries which centre their retirement income policy on private mandatory retirementsaving. This paper provides a succinct description of the current system along with an analysis of itsstrengths and areas where improvement is still needed.

  0nnuity arkets and %enefit @esign in ultipillar !ension Schemes9 E*perience and Messons from)our Matin 0merican ?ountriesSocial !rotection @iscussion !aper Co. +'+5; !ublication @ate9 $++'G+/by 8obert !alacios and 8afael 8ofman

 0 growing number of countries have introduced mandatory defined contribution schemes. 0s theseschemes mature, their success will increasingly depend on how well they translate accumulated fundsinto a stream of retirement income. Successful reforms will rely on a well regulated and competitiveinsurance sector. They will strike a balance between individual preferences and public policy ob:ectivessuch as providing a reasonable amount of longevity insurance. This paper describes the benefit stage infour Matin 0merican countries and presents preliminary evidence on their emerging annuities markets.#e find that these markets are less transparent than they should be and that supervision is less strictthan during the accumulation period. 0nnuities markets will grow dramatically in the coming decades asthe reforms mature. Browth depends on policy variables such as the use of recognition bonds as well as

initial conditions. The markets in !eru and ?olombia will be much smaller than those in ?hile and 0rgentina in both absolute and relative terms. The immaturity of the schemes and temporarily limited flowof new pensioners should be viewed as a window of opportunity for improving supervision, increasingtransparency and educating workers.

 IaFakhstan9 0n 0mbitious !ension 8eformSocial !rotection @iscussion !aper Co. +'+2; !ublication @ate9 $++'G+'by Emily S. 0ndrews

The pension reform in IaFakhstan was instituted to remove a deteriorating and costly pay"as"you"go(!0HB7 system with limited revenues, a relatively low worker to pensioner ratio, and accumulatingpension arrears. 0nalysis was conducted to assess whether the economy could sustain a radical reform,which would make the implicit pension debt e*plicit. The first section of this report reviews the reform andprovides a synopsis of the thinking behind its development, including the events leading up to it and thefailings of the !0HB7 system. 3n the second section, the administrative, business, and regulatory

structures created by the pension reform legislation are described. 3n the third section, the progress ofthese entities in meeting the ob:ectives of the reform is evaluated, particularly in terms of regulatory andfinancial market performance.

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2000

 ?ontractual Savings or Stock arket @evelopment9 #hich Meads

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Social !rotection @iscussion !aper Co. ++$+; !ublication @ate9 $+++G+by ario ?atalan, Bregorio 3mpavido and 0lberto 8. usalem

This paper studies the relationship between the development of contractual savings (assets of pensionfunds and life insurance companies and capital markets. The focus is on the macroeconomic andfinancial effects of contractual savings4 development. Cew theoretical ideas and empirical results are

presented. 0t the theoretical level, we e*plain how the growth of the contractual savings sector promotesfinancial development and economic growth through different channels. The authors argue that amonginstitutional investors, contractual savings institutions are the most effective at developing capitalmarkets. #hat is different about contractual savings is that their liabilities are long"term and illi6uid assetsin asset holders4 portfolios. 0t the empirical level, the authors analyFe Branger causality betweencontractual savings and both market capitaliFation and value traded in stock markets for some 7E?@and other countries. The evidence suggests that the growth of contractual savings cause thedevelopment of capital markets.

 !ension 8eform and !ublic 3nformation in !olandSocial !rotection @iscussion !aper Co. ++'<; !ublication @ate9 $+++G+by 0gniesFka ?hlon

The introduction of a new pension system in !oland in '<<< was the culmination of a long policy dialogueand years of debate. @uring this period, the role of public opinion shaped the reform and was shaped by

the reform process. 3mplementation of the reform will also be affected by the 6uality of informationavailable to the public and their financial literacy. 3n contrast to their passive role in the old public,defined"benefit schemes, !oles that chose to divert their contributions to individual, defined"contributionaccounts must now take an active role in the new system. This paper documents the fascinatingevolution of public opinion and its affects on the reform process as well as the early e*periences ofmillions of !oles who, for the first time, are faced with the challenge of choice as consumers in the newmarket for pension services.

 8egulating !rivate !ension )unds4 Structure, !erformance and 3nvestments9 ?ross"country Evidence

Social !rotection @iscussion !aper Co. +''/; !ublication @ate9 $+++G+5by !.S. Srinivas, Edward #hitehouse and Auan Hermo

%ecause defined"contribution systems e*pose pensions to a number of risks, reforming governmentshave often strictly regulated the pension fund industry4s structure, performance, and investments. Thispaper compares the rules in the new systems of Matin 0merica and eastern Europe with richer 7E?@countries. The authors argue that the benefits of competing pension funds and individual choice can onlybe achieved if regulations are loosened in the medium term.

 Dow !oor are the 7ld 0 Survey of Evidence from 22 ?ountriesSocial !rotection @iscussion !aper Co. ++'5; !ublication @ate9 $+++G+>by Edward #hitehouse

This paper surveys '' international comparative studies of poverty, income distribution and the elderly. 0lthough it focuses on 7E?@ economies, some 22 countries are covered. The paper addresses a seriesof 6uestions. #hat level are the incomes of the elderly relative to the population as a whole Dow hasthis changed over the past two decades Dow many of the old are poor Dow many of the poor are old 0re the oldest old poorer than younger pensioners Dow do widows fare #hat is the mi* betweenpublic and private sources of income @o the elderly poor remain poor There is also a discussion of

methodological issues. The results show that the incomes of the elderly are typically around + per centof incomes of the populations as a whole. 3n most countries, this ratio has been increasing over the pasttwo decades. 0lthough there remain pockets of poverty among the elderly, most studies show that the oldare represented proportionally or under"represented among the poor.

  0dministrative ?harges for )unded !ensions9 0n 3nternational ?omparison and 0ssessmentSocial !rotection @iscussion !aper Co. ++'>; !ublication @ate9 $+++G+>by Edward #hitehouse

!ension fund charges reduce the rate of return on pension accounts in some countries by up to by twopercentage points. @o charges of this scale undermine the case for funded pension provision Dow can

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governments hold back costs and charges This paper looks at evidence from thirteen countries, withpolicies ranging from complete liberaliFation of charge levels of structures to government imposed chargeceilings. The author stresses the trade"offs in limiting charges, especially in reduced competition andchoice.

 The !ension System in 0rgentina9 Si* Hears 0fter the 8eform

Social !rotection @iscussion !aper Co. ++'1; !ublication @ate9 $+++G+>by 8afael 8ofman

3n a conte*t of a serious financial and legal crisis, 0rgentina reformed its !ension System in '<<2, whena multipillar model with a funded scheme was introduced and first pillar parameters, as minimum age andvesting re6uirements were tightened. The new system has a significant first pillar (which offers a flatbenefit currently valued at $ of average wage to all retirees and a second pillar that should provide asimilar amount, once the transition is completed. The new system has developed rapidly and most formalworkers have :oined the new funded scheme. Dowever, there are some problems that must be resolved.3n the first pillar, the reform balanced long term finances, but it will also reduce coverage very rapidly, asa conse6uence of the combined effect of low formality in the labor market and stricter contributionre6uirements. The most serious problems in the funded pillar are the administration costs and the needto improve regulation and supervision of insurance companies, that provide disability and survivorscoverage and annuities to beneficiaries. #hile these problems are important, their conse6uences can beavoided if ade6uate policies are developed by the Bovernment. 3n this sense, the e*perience of the

pension reform in 0rgentina is an e*cellent lesson for other countries that are considering a reform intheir own systems.

!ension Systems in East 0sia and the !acific9 ?hallenges and 7pportunitiesSocial !rotection @iscussion !aper Co. ++'2; !ublication @ate9 $+++G+>by 8obert DolFmann, 3an #. ac 0rthur and Hvonne Sin

#ith the recovery from the recent crisis, countries of the East 0sia and !acific region are rethinking theirfinancial and social policy, including old"age protection. !opulation aging, in combination with ongoingurbaniFation and economic transformation, will place increasing pressure on traditional family carearrangements. ?overage under formal pension systems is generally low, and the absence of socialsafety nets for the needy elderly poses risks in the face of breaks in the economic growth path. 3naddition to common systemic challenges, formal old"age income support systems confront issuesspecific to their design type9 (i The national provident fund and social security"style systems with reserve

funds have demonstrated problems with investment policy and performance, governance andmanagement. (ii 3n the established market economies, social security"type systems are fiscallyunsustainable in the long run and often have a weak benefit"contribution link. (iii These types of systemsencounter additional problems in transition economies, including low contribution collection frompreviously socialiFed enterprises and rising benefit take"up, partly as a conse6uence of the policyresponse to labor market dise6uilibria. @espite the formidable reform agenda, countries have abundantopportunities to address these issues, and the low level of coverage, predominance of retirementschemes still in evolution and e*istence of funded provisions in many countries provide an environmentconducive to reform. 7ptions involve (i avoiding mistakes (adopting an integrated view on retirementincome provision, balancing individual e6uity and social e6uity with efficiency considerations, avertingfiscal unsustainability and integrating public and private sector pensions; (ii being innovative (movingtoward a multipillar structure, prudently e*tending coverage, trying new approaches to reduceadministrative costs and e*tending social risk management through informal support and safety nets;and (iii fostering financial markets (decentraliFing pension fund management; reviewing governance,regulation and supervision; and creating or supporting the provision of new instruments.

 The Swedish !ension 8eform odel9 )ramework and 3ssuesSocial !rotection @iscussion !aper Co. ++'$; !ublication @ate9 $+++G+>by Edward !almer 

This paper describes the recent Swedish reform and available options on ma:or issues within this reformframework. 3n Aune '<<2, Sweden4s !arliament passed legislation replacing the old defined benefitsystem with a combination of a pay"as"you"go notional defined contribution (C@? and a @? privatelymanaged financial account scheme, based on a total contribution rate of '.1 percent on earnings. Thefinancial account scheme is run using a state"clearing house as a broker, and will have a state monopolysupplier of annuities. @uring the accumulation period, participants can choose among all registered

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funds, about 1++ when they make their first choice in the autumn of $+++. 0ccounts were created in'<<<, and two annual statements have been sent out since then. 3f the C@? and financial accountschemes together do not reach a minimum level by age >1, and the individual chooses to retire at thisage, benefits from these systems will be supplemented up to the guarantee level, determined by!arliament and financed with a state budget transfer. This reflects the fact that the !0HB C@? andfinancial account schemes are designed to function autonomously from social policy. Mife e*pectancy is

factored into the C@? annuity, and together with the financial account system, this innovation helps toshift the risk of an aging society onto workers while they are still active. There is no ma*imum retirementage, and the system offers a broad range of options for labor"force e*it for older workers. )ull, partial orno earnings from work can be combined freely with full or partial annuities from one or both of the publicschemes from the minimum pension age of >'.

?an 3nvestments in Emerging arkets Delp to Solve the 0ging !roblemSocial !rotection @iscussion !aper Co. ++'+; !ublication @ate9 $+++G+1by 8obert DolFmann

!refunding of pension commitments in 7E?@ economies is increasingly seen as a central strategy tocope with the aging of their populations. This paper argues that investments in emerging markets canhelp at the margin but are unable to solve the demographic problem. #hile these investments bringpotential advantages through enhanced risk diversification, higher rates of return, and acceleratedfinancial market development, the total effects are likely to be limited. )urthermore, in order to harvest

them, capital sending and receiving countries must fulfill various politically and economically challengingre6uirements. )or pension policy, the limited contribution of pre"funding at home and abroad in order toaddress the demographic problem implies that enhanced emphasis must be given to domestic reforms.

 3nternational !atterns of !ension !rovision (>2kb pdf

Social !rotection @iscussion !aper Co. +++<; !ublication @ate9 $+++G+2by 8obert !alacios and ontserrat !allares"iralles

?ross country data on public and private pension schemes are presented and e*plained. 8elevant #orld%ank demographic pro:ections and other indicators previously reported in 0verting the 7ld 0ge ?risisare updated. 8elationships between key indicators are highlighted.

 8egulation of #ithdrawals in 3ndividual 0ccount SystemsSocial !rotection @iscussion !aper Co. +++; !ublication @ate9 $+++G+'

by Aan #alliser 

)unded mandatory pension systems based on individual accounts are spreading around the world. #iththe maturation of those systems, regulating the withdrawal of retirement savings will become increasinglyimportant. Bovernment regulation of withdrawals should mandate the purchase of inflation"inde*ed lifeannuities e*ceeding income available from government welfare programs for the retiree and potentialsurvivors. Dowever, proper functioning of insurance markets does not re6uire annuitiFing the entireaccount balance. 3nstead, more fle*ibility for the choice of withdrawals could be permitted for anyremaining funds, helping to tailor income streams to individual needs and living arrangements.rms of thee*isting unfunded programme with greater emphasis on funding the 4insurance4 element of the pensionplan.

 !ension 8eform, )inancial Miteracy and !ublic 3nformation9 0 ?ase Study of the United Iingdom

Social !rotection @iscussion !aper Co. +++2; !ublication @ate9 $+++G+'by Edward #hitehouse

The pro:ect on public information and pension reform will e*plore these issues by e*amining a range ofcountries4 e*perience. This, the first paper in the series, looks at the e*perience of the United Iingdom. 0number of interesting initiatives to improve general and individual pension information are described andassessed.

 anaging !ublic !ension 8eserves !art 39 Evidence from the 3nternational E*perienceSocial !rotection @iscussion !aper Co. +++/; !ublication @ate9 $+++G+'by 0ugusto 3glesias and 8obert A. !alacios

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any pension schemes mandated by governments have accumulated large reserves. The managementof these funds has a direct effect on financial sustainability and potential benefit levels. 3t also hasimportant indirect effects on the overall economy when the funds are large. !art 3 of this study surveyssome of the available cross"country evidence on publicly"managed pension reserves. #e find thatpublicly"managed pension funds (i are often used to achieve ob:ectives other than providing pensions (iiare difficult to insulate from political interference and (iii tend to earn poor rates of return relative to

relevant indices. These findings are consistent across countries of all types, but returns are especiallydismal in countries with poor governance. The e*perience to date suggests that the rationale forprefunding have been seriously undermined by public management of pension reserves. ?ountries withserious governance problems should probably avoid funding altogether.

E*tending ?overage in ulti"pillar !ension Systems9 ?onstraints and Dypotheses, !reliminaryEvidence and )uture 8esearch 0gendaSocial !rotection @iscussion !aper Co. +++$; !ublication @ate9 $+++G+'by 8obert DolFmann, Truman !ackard and Aose ?uesta

The paper provides a set of preliminary hypotheses and e*ploratory econometric testing to e*plain lowrates of participation in reformed social security systems, with special emphasis on two Matin 0mericancountries. The hypotheses claim that the working poor and self"employed continue to have a specific andstrong rationale for avoiding participation in the multi"pillar pension system and that transactions costs,system design issues, and problems of credibility negatively influence the decision of all members of the

labor force to participate. Some of the established hypotheses have been sub:ected to e*ploratoryeconometric testing using available household survey data for ?hile and 0rgentina. The results supportthe con:ecture that socioeconomic characteristics matter for (non participation, and that the poor, theuneducated and the self"employed pose a special challenge to the e*tension of pensions coverage. Thepaper outlines a research strategy, including a more social security"focussed survey and comparativeanalyses, to confirm the results presented in this paper, and to test those hypotheses related to thedifferent pensions institutions reforming governments have chosen to put in place. #ork in this vein hasalready begun.

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1999

3mproving the 8egulation and Supervision of !ension )unds9 0re There Messons from the %ankingSector Social !rotection @iscussion !aper Co. <<$<; !ublication @ate9 '<<<G'$by 8oberto 8ocha, 8ichard DinF and Aoa6uin ButierreF

The increasing role of private funded systems in the provision of retirement income has led to anincreasing interest in the analysis of regulatory and supervisory frameworks of the pension industry. Thispaper reviews the regulatory framework for pensions and e*amines whether there is scope forimprovements in regulation and supervision. 3n carrying out this analysis, the paper also reviews brieflythe regulatory framework for banks and asks whether there are lessons from bank regulation to pensionregulation. !ossible lessons from the banking industry arise in the area of guarantees, portfoliodiversification, and the structure of supervision. any countries have considered the introduction ofguarantees to deal with market risk. The paper argues that multi"pillar constructions already reduce theworkers4 e*posure to market risk, and that further efforts to reduce this risk should be very cautiouslyconsidered. #ithin the possible solutions to deal with market risk, the paper favors deferrals of pensionsand different packages of annuities over guarantees. The paper also argues that pension supervisionshould e*amine the trends in bank supervision, which has been shifting from a basic inspection ofcompliance to a more general assessment of the 6uality of corporate governance in banks, and a moreeven distribution of responsibility among different market players, including boards, shareholders, ande*ternal auditors.

 Cotional 0ccounts as a !ension 8eform Strategy9 0n EvaluationSocial !rotection @iscussion !aper Co. <<$; !ublication @ate9 '<<<G'$by 8ichard @isney

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The paper surveys and evaluates Cotional 0ccount"type pension reforms (sometimes known as Cotional@efined ?ontribution plans, or C@?s. The distinguishing feature of such reforms is that a structure ofindividual accounts is established, to which contributions notionally accrue. Co fund as such isestablished and the implicit 4return4 on such accounts is determined by a formula linked to someunderlying inde* of real wage bill growth. Cotional 0ccount (C0"type reforms are described in a numberof countries9 in 3taly, Matvia, Sweden and !oland. Cotional 0ccounts are, in effect, identical to a well"

designed defined benefit !0HB scheme with reasonable actuarial ad:ustments and a revalued lifetimeearnings basis to pension benefits. The paper argues that, when e*amined on grounds of 4actuarialfairness4, macroeconomic sustainability and microeconomic incentives, a reform strategy that introducesCotional 0ccounts as the centrepiece of the package is inferior to a strategy that combines 4parametric4reforms of the e*isting unfunded programme with greater emphasis on funding the 4insurance4 element of the pension plan.

 8eform 7ptions for !ay"0s"Hou"Bo !ublic !ension SystemsSocial !rotection @iscussion !aper Co. <<$5; !ublication @ate9 '<<<G'$by Sheetal I. ?hand and 0lbert Aaeger 

The recent history of traditional public pension schemes is one of continuous read:ustment of benefitformulas, retirement ages and other parameters. This paper reviews the basic relationships thatdetermine the fiscal sustainability of public pension schemes, the challenges of maturation and agingpopulations when schemes are finance on a pay"as"you"go basis and the options available to

policymakers short of systemic reform.

 !ension !lans and 8etirement 3ncentivesSocial !rotection @iscussion !aper Co. <<$2; !ublication @ate9 '<<<G+by 8ichard @isney and Edward #hitehouse

The value of defined"contribution pensions, where the benefit depends on contributions and investmentreturns, shows a very different pattern with age of retirement from defined"benefit pensions. @%schemes, which are the norm in most public and much private provision around the world, provide anincentive to retire at the earliest possible age. @? schemes, in contrast, encourage people to remain inthe labor force. The paper also assesses the features of @% plans which provide the greatest disincentiveto continued employment at older ages, such as their accural structure with age and formulae based onfinal rather than average earnings. 8eforms to @% systems, such as pension increments for laterretirement, are e*amined. %ut the incentives are not as powerful as those in a @? plan.

 Shaping !ension 8eform in !oland9 Security Through @iversitySocial !rotection @iscussion !aper Co. <<$/; !ublication @ate9 '<<<G+by 0gniesFka ?hlon, arek Bra and ichal 8utkowski

 0ll over the world, pension systems have financing difficulties that need to be addressed. There are threeways of dealing with pension systems problems = finance it to a greater e*tent from general revenues,rationalise the system, which produces savings in the short run, or a full"fledged reform, changing thelogic and foundations of the system. 0fter several years of political and professional discussions, !olanddecided to follow the latter path and introduced a new defined contribution mulitipillar system, consistingof a public Cotional @efined ?ontribution, pay"as"you"go first pillar, a funded private second pillar, andvoluntary funded third pillar. The new framework covers only retirement savings, while other benefits stillremain under the old defined"benefit pay"as"you"go regime. The reform was launched on Aanuary ','<<<. 0s of this date, the old defined benefit pay"as"you"go system was terminated for workers youngerthan 1+. The new old"age system attempts to offer actuarially fair benefits, potentially creating incentives

to increase compliance and postpone retirement. inimum benefit provision for those who fall below theguaranteed level is co"financed from general revenue. @iversification of retirement savings providesgreater security to the members, as labour market developments that determine the notional rate ofreturn in the first pillar, and financial market developments that determine the second pillar rate of returnare not perfectly correlated. This is why the reform package has been named Security through @iversity.This paper presents the current situation of the pension system, the struggle for pension reform in the'<<+s, structure, the long"term outlook of the new pension system and the main aspects of the systemdesign as well as first e*periences from the implementation process. Mong"term pro:ections show that thenew system allows for greater financial stability of the public pension scheme and increases the savingsrate with a positive impact on economic growth.

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Matvian !ension 8eformSocial !rotection @iscussion !aper Co. <<$$; !ublication @ate9 '<<<G+by Mouise )o* and Edward !almer 

3n '<<1, Matvia became the first country in ?entral and Eastern Europe to implement parametric reform of the Soviet"style !0HB7 pension system, and the first in the world to implement the notional defined

contribution system originally designed for Sweden. The Bovernment4s intention was to follow theoverhaul of the !0HB7 system with the creation of a funded second tier by '<<, but the reform haslagged. !ublic acceptance of the new system has been poor, and pressures for rollback of the reformshave grown. 0fter such a splashy beginning why did the Matvian reform stall #hat has been the neteffect of the reforms after the roll backs Dow did Matvia balance the difficult issues of system incentives,fairness (within and across generations and affordability #hat are the lessons of the Matviane*perience with the C@? system for other reforming countries These 6uestions are the sub:ect of thispaper. 3t includes a description of pre"reform situation, describes the key provisions of the original reformand discusses the subse6uent amendments. The impact of the reform is assessed on the basis ofmacroeconomic and microeconomic simulations. 7n the basis of those, the reforms are evaluated andconclusions for other countries are drawn.

 7E?@ !ublic !ension !rogrammes in ?risis9 0n Evaluation of the 8eform 7ptionsSocial !rotection @iscussion !aper Co. <<$'; !ublication @ate9 '<<<G+by 8ichard @isney

!ublic pension programmes in 7E?@ countries are in difficulties. #ith ageing populations, and decliningparticipation of working age men in paid work, e*isting pension arrangements are likely to beunsustainable in the future in many of the richer 7E?@ countries. 3ndeed, supporting e*isting pensioncommitments, even before the 4baby boom4 generation reaches retirement, has already provedproblematic in countries such as 3taly. Some governments have already taken steps to tackle the pensionissue but there is inevitably conflict over who will bear the burden of retrenchment9 will it be currentta*payers, current pensioners, or future generations of ta*payers and pensioners, perhaps not yet bornThis paper considers several issues. 3t e*amines the evidence as to whether public pension programmesin some richer 7E?@ countries are indeed in need of ma:or surgery, focusing in particular on the issue offiscal sustainability. 3t then considers why programmes have got into f inancial difficulties. ?onsideration of this issue provides some clues as to what type of reform process is likely to be viable and credible. Thepaper then e*amines the strengths and weaknesses of some reform strategies. 0 central issueconsidered there is whether pension programmes should be funded or unfunded.

 The !ension System in SingaporeSocial !rotection @iscussion !aper Co. <<'<; !ublication @ate9 '<<<G+by ukul B. 0sher 

Singapore4s formal pension system includes several elements including a non"contributory publicemployees scheme and social assistance for the elderly. The main source of mandatory retirementsavings however, is the ?entral !rovident )und or ?!) which also includes a variety of other forcedsavings programs covering housing, medical savings and other social ob:ectives. This paper focuses onthe defined contribution scheme whose role it is to provide income during retirement. @espite a high levelof service and efficiency, the ?!) has historically generated low returns to individuals under a centraliFedand opa6ue investment regime. This threatens to leave many old persons in Singapore with insufficientsavings when they retire. 8ecent initiatives to allow contracting out of the investment with unit trusts andliberaliFation of investment rules may eventually provide the risk"return combination re6uired for a fundedpension scheme. 0t the same time, a public information campaign and a strengthening of regulations will

help ensure that individuals are able to take advantage of these reforms.

 Taking Stock of !ension 8eforms 0round the #orldSocial !rotection @iscussion !aper Co. <<'5; !ublication @ate9 '<<<G+1by 0nita . SchwarF and 0sli @emirguc"Iunt

Systems providing financial security for the old are under increasing strain throughout the world. 7ver thene*t /1 years, the proportion of the world4s population that is over >+ will almost double, from < percentto '> percent. !opulations are aging rapidly due to rising life e*pectancies and declining fertility rates.This puts added strain on e*tended families and other traditional ways of supporting the old which arealready weakening under the pressure of urbaniFation, industrialiFation, and increased mobility. 0t the

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same time, public systems of old age security are themselves in need of reform. ost e*isting systemsare very costly even though they provide inade6uate protection for the old. The purpose of this paper isto provide a brief summary and evaluation of recent pension reforms around the world.

 The Ta* Treatment of )unded !ensionsSocial !rotection @iscussion !aper Co. <<'+; !ublication @ate9 '<<<G+2

by Edward #hitehouse

!ension funds are an important part of private savings flows, the main supplier of capital to industry andplay a large and growing role in providing retirement incomes in countries with mature funded pensionsystems. 8eforms which increase the emphasis on privately managed, funded pensions must get the ta*treatment right. This paper sets out the options for ta*ing pensions, and the arguments between them.The ta* treatment in /1 different countries is described and summariFed in an empirical measure9 themarginal effective ta* rate. 7ther data assess the importance of pension funds and ta* incentives inaggregate, drawing on national and international sources.

 ?ollecting and Transferring !ension ?ontributionsSocial !rotection @iscussion !aper Co. <<+5; !ublication @ate9 '<<<G+$by Bustavo @emarco and 8afael 8ofman

?ollecting social security contributions is an important operational issue in all types of pension system.

any regimes are plagued by poor compliance and weak, inefficient administration. Some countrieshave tried to introduce an automatic incentive to contribute by moving systems closer to 4actuarialfairness,4 where pension benefits are more strictly related to individual contributions. E*amples includethe systems of individual accounts introduced in a range of countries in Matin 0merica and EasternEurope. %ut in these regimes, collecting and transferring contributions is a more comple* process. Thispaper considers different aspects of the process of collecting pension contributions.

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199

 Supervising andatory )unded !ension Systems9 3ssues and ?hallenges ('+kb pdf

Social !rotection @iscussion !aper Co. <'5; !ublication @ate9 '<<G'$

by Bustavo @emarco and 8afael 8ofman

The regulation and supervision of pension funds is a critical part of building public confidence in afunded"pension system. This paper argues that confidence is best bolstered by an independent,autonomous and transparent supervision agency, particularly when previous systems had failed. Thechoice between proactive and reactive supervision depends on previous e*perience of self"regulation ina country4s financial sector. The paper e*amines four key areas of supervision in detail9 institutional,financial, membership and benefits control. 3t looks at collection of contributions, asset valuation, portfoliolimits, custodianship and benefit guarantees. Cew data are presented on the performance of supervisionagencies in and on marketing and operation costs of new pension funds in Matin 0merica. ?omparativedata for 7E?@ countries is also included.

Social !rotection @iscussion !aper Co. <'1 " This paper has been revised, please see Co. <<$/

 The 8ole of ?hoice in the Transition to a )unded !ension SystemSocial !rotection @iscussion !aper Co. <'$; !ublication @ate9 '<<G+<by 8obert !alacios and Edward #hitehouse

 0 critical 6uestion in the transition to a funded, private pension system is whether the new privateelement is presented as a mandate or choice to current and future workers. This paper sets out thespectrum of available options and looks at policy in '/ reforming countries. 3t concludes that olderworkers are best e*cluded from reform, because the economic benefits are small and the politicalresistance is likely to be large if they are included. Dowever, a defined cut"off age is arbitrary for reasonsof intergenerational e6uity and heterogeneity of portfolio composition and risk preferences within cohorts. 0 voluntary switch is preferred. The main ob:ection is the resulting uncertainty over the numbers

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switching. 0nalysis of reforming countries shows however, a consistent and rational pattern of switching.The paper concludes by discussing policy options for managing the switching process.

 !ension 8eform in %ritainSocial !rotection @iscussion !aper Co. <'+; !ublication @ate9 '<<G+>by Edward #hitehouse

This paper e*amines the evolution of the pension system in %ritain. 3n particular, it focuses on the shiftfrom pay"as"you"go, state"run defined"benefit pensions to individual, private"sector, funded defined"contribution accounts. 3t looks at three issues in this reform9 the financing of the transition from pay"as"you"go to funded provision; the fiscal impact of voluntary switching and adverse selection; and the6uestion of the degree to which personal pension accounts were 4over"sold4 to individuals for whom theywere not suitable. The paper e*amines recent reform proposals and the prospects for reform under theCew Mabour government elected last year. 3t concludes that the %ritish system has avoided a futurefinancial crisis arising from the demographic transition, but that problems of incentives and retirement"income ade6uacy remain.

 )inancing the Transition to ultipillar Social !rotection @iscussion !aper Co. <+<; !ublication @ate9 '<<G'$by 8obert DolFmann

The shift from a !0HB pension scheme to one which is fully funded ends the process of rolling over theunreported pension debt with each new generation. To the e*tent that current pensioners and workershave amassed pension rights in the old !0HB scheme, the government will be forced to borrow or ta* inorder to meet this obligation, which is often larger than the conventionally defined public debt. This paperfocuses on assessing the siFe of the initial debt that will be made e*plicit, reducing it through policymeasures and financing the transition through a combination of debt and ta* financing. !roducing such astrategy is a key challenge to pension refromers and crucial in determining the success or failure of thistype of reform.

 The #orld %ank 0pproach to !ension 8eform ('5kb pdf

 0lso available in )rench (5>kb pdf

Social !rotection @iscussion !aper Co. <+5; !ublication @ate9 '<<<G'$by 8obert DolFmann

The paper highlights the #orld %ank4s thinking and worldwide involvement in pension reform. %oth aredriven by the %ank4s mandate to help countries develop economically and to reduce poverty. The %ankhas four key concerns in working with clients on pension policy9 (' short"term financing and long"termfinancial viability; ($ effects on economic growth; (/ ade6uacy and other distributive issues; and (2political risk and sustainability. 3n response to these concerns and after review of the three main reformoptions for unfunded systems " mere !0HB reform, a rapid and complete shift to a mandatory fundedsystem, and a gradual shift to a multi"pillar scheme " the %ank clearly favors the multi"pillar approach butin a pragmatic and country"specific manner. #hen helping to implement a pension reform the %ank fullytakes account of country preferences and circumstances, bases its support on sound reform criteria, linksthe client assistance with knowledge management, provides training and other measures to enhance thereform capacity of a country, and seeks cooperation with other international institutions. 3n addition, the%ank has a comprehensive research agenda to improve the working of multi"pillar schemes, and theinvestigations include issues of coverage, administrative costs and annuities.

 Bovernment Buarantees on !ension )und 8eturns

Social !rotection @iscussion !aper Co. <+>; !ublication @ate9 '<<G+2by Beorge !ennacchi

This essay reviews defined contribution pension return guarantees typically made by governments inconnection with pension privatiFations. )inance theory related to the pricing of options provides a unifyingframework for evaluating the cost of these guarantees. The essay considers two types of guarantees onthe rate of return earned by an individual pension fund9 a guarantee of a fi*ed minimum rate of return;and a guarantee of a minimum rate of return that is set relative to the performance of other pensionfunds. 0 minimum pension benefit guarantee for a participant in a mandatory defined contributionpension plan is also discussed. ?osts for each of these guarantees are illustrated using typical parameter values.

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 The Dungarian !ension System in TransitionSocial !rotection @iscussion !aper Co. <+1; !ublication @ate9 '<<G+2by 8obert !alacios and 8oberto 8ocha

 0fter discussing the evolution of the policy dialogue in Dungary, the paper broadly describes the reform of 

the pay"as"you"go public pension system and its partial privatiFation as legislated in Auly '<<5. Through acombination of a debt and ta* financed transition, the first partial pension privatiFation in ?entral Europeis shown to generate increased national savings while placing the pension system on a more sustainablecourse. The potential positive impact on savings was diminished by politically"motivated compromises.7utstanding issues include problematic features of the second pillar and the reemergence of pay"as"you"go deficits in the long run. This suggests that further reforms, such as raising the retirement agebeyond >$, will eventually be re6uired.

 8isks in !ensions and 0nnuities9 Efficient @esignsSocial !rotection @iscussion !aper Co. <+2; !ublication @ate9 '<<G+$by Salvador Laldes"!rieto

This paper considers alternatives to disperse the accumulated pension rights during the li6uidation phaseor retirement. )irst, the paper classifies the risks that affect pensioners, discusses the defined benefit anddefined contribution options, and classifies pension contracts according to the type of risk they transfer to

the worker. 3t considers fi*ed annuities, variable annuities, ?8E) annuities, and programmedwithdrawals. This part is a description of the production function for pensions and annuities. Second, thepaper offers a discussion of the restrictions that should be imposed by mandatory pension systems onthe menu of pension contracts. 7ne section discusses whether lump sum withdrawals should be allowedand the other discusses if there should be a mandate to annuitiFe wealth. The argument that theannuitiFation should be mandated to prevent adverse selection is re:ected on the basis of ?hileanevidence.

 %uilding an Environment for !ension 8eform in @eveloping ?ountriesSocial !rotection @iscussion !aper Co. <+/; !ublication @ate9 '<<G+'by 7livia S. itchell

)iscal problems are prompting many developing nations to amend and sometimes restructure theirnational old"age programs. 0s they do so, these countries seek guidance on how to design market and

regulatory structures to enhance their chances of success. This paper investigates the types of risksfacing participants in retirement systems, and e*amines which financial, regulatory, and labor marketinstitutions appear most supportive of retirement system reforms, and most urgently needed, indeveloping countries.

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  city in crisis! -"at.s "o one researc" group descri#es /ockford #ecause of its pension

pro#lems! (t gives t"e city a critical rating, and arns taxpayers aren.t t"e only ones feeling

t"e impact!

0 lot of attention is #eing put on C"icago #ecause C"icago is t"e super dangerous pension

system in t"e state, #ut t"ey.re pretty muc" ignoring "at.s "appening in t"e municipal

level,1 said -ed 2a#roski it" t"e (llinois Policy (nstitute!

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 3"at.s "appening in /ockford, according to 2a#roski, is t"e pension system is failing!

0Most taxpayers don.t understand 4ust "o #ad t"ings are! (.m not sure t"at city orkers

understand 4ust "o #adly funded t"eir pensions are,1 "e said!

5is report s"o t"e city.s police and fire pensions "ave only &6 cents for every dollar

promised for t"eir retirement! (t also s"os taxpayers are paying more t"an ever!

0)ver t"e last 76 years, taxpayers contri#ution to t"at system "ave almost dou#led,1 said

2a#roski! 0nd surprisingly despite all t"at ne money t"at.s going from taxpayers from

t"e #udget into pensions, t"e pension systems are not doing t"at muc" #etter!1

2a#roski says t"e city is also paying more! -"e cost of t"at means less money for

infrastructure, roads and 4o#s!

03e.ve "ad to lay off employees! 3e.ve #een don in terms of t"e num#er of police officers,

 e made reductions in our fire staffing,1 said /ockford Mayor Larry Morrissey!

Morrissey says state pension reform as a start, #ut /ockford needs more "elp!

0Local police funds, local fire pension funds ere untouc"ed! -"ose are t"e ones t"at e.re

asking t"e state to address! nd if t"ey can address t"ose, e can get a "andle on our

unfunded lia#ility and #e in muc" stronger fiscal "ealt",1 said Morrissey!

But State Senator 2ave Syverson says it.s t"e local government t"at needs to get a "andle on

t"e situation!

0-"e state could come in and try to force a c"ange on local governments! But t"at.s really

more of a last resort #ecause it.s not our 4o# to come in and force somet"ing on a local

community and #e t"e #ully,1 said Syverson!

Mayor Morrissey disagrees!

0-"e issue is a state government issue, e don.t set t"e #enefits levels,1 "e said!

Syverson says t"e state ill ork it" municipalities #ut state lamakers can.t do all t"e"eavy lifting!

03"at ould #e a #etter solution is if 8#ot" sides ould sit don look at t"e pro#lem and

try to come up it" a reasona#le solution t"at #ot" could agree it" and t"en come to t"e

state and say "ere.s a solution t"at e "ave! Can you "elp pass t"is91 said Syverson!

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 3e contacted State Senator Steve Stadelman.s office to eig" in on t"is issue! 5e did not

return our calls!