Torino, September 2008

Innovative Institutions and Products for Retirement Provision in Europe

Lans Bovenberg and Theo NijmanRiccardo Calcagno

VU University Amsterdam

Lugano, May 23 2

A short summary

The starting point: pension systems are under reform From unfunded plans (PAYG) to funded schemes

New challenges: Transition period Collective vs. individual plans DB vs. DC plans: optimal risk sharing

Start looking at a base life cycle model to define a “first best” allocation of saving and risk

Compute the welfare losses due to market incompleteness / financial constraints

Lugano, May 23 3

A short summary Are individuals able to implement the first best?

Financial illiteracy Hyperbolic discounting (time inconsistency) Under-diversification (access to capital markets may be

excessively costly) How can collective plans improve on individual choices?

DB, DC or “hybrid” plans?

Gaps in the literature Human capital is risky Liquidity constraints Hedge of systematic risk

A description of the Dutch “stand-alone” collective schemes

Recommendations about European research infrastructure and networks

Lugano, May 23 4

My interpretation and questions Individual choice is optimal under strong assumptions

When individual cannot implement the “first best” collective plans may improve welfare

However, simple individual plans (e.g. DC with constant premia) are not the solution

Methodology (BKNT): compute welfare losses due to a “friction” from the first best

Force individuals into collective plans: DB vs. DC

Lugano, May 23 5

My interpretation and questions Difficulties in creating fully funded DB plans: regulation may

not be too strict? New accounting rules Mark to market obligations

“Hybrid” plans are better;

Collective plans are not “tailor-made”: good for the “average” individual?

Agency issues (even in independent trusts as the Dutch stand-alone funds);

More severe agency issues in traditional DB funds Risk-taking by companies who have a claim on possible

surplus in the fund

Three lines of research

Markets and institutional frictions New financial instruments and market design

Agency issues Governance / creation of new institutions

Individual “biases” Experiments