Automatic balance mechanisms for notional defined contribution pension systems guaranteeing social adequacy and financial sustainability: an application to the Italian pension system

Abstract Since the mid 1990s some European countries (including Italy) implemented a Notional Defined Contribution (NDC) pension system. Such a system is based on pay-as-you-go funding, while the pension amount is a function of the individual lifelong contribution. Despite many appealing features, the NDC system presents some drawbacks: first, it is vulnerable to demographic and economic shocks compromising the financial sustainability; second, it could fail to guarantee adequate pension benefits to pensioners. In order to reduce the first limit, automatic balance mechanisms (ABMs) have been proposed in literature and also implemented in Sweden, while solutions that combine financial sustainability and social adequacy have been applied only in a pay-as-you-go point system. The aim of this paper is to insert into the Italian NDC architecture ABMs that preserve social adequacy under financial sustainability constraints. Godinez-Olivares et al. (Insur Math Econ 69:117–126, 2016) built ABMs for a Defined Benefit pension system using nonlinear optimization techniques to calculate the optimal paths of the control variables representing the main drivers of the system: contribution rate, retirement age and indexation of pensions. Following this line of research, we have developed a nonlinear optimization model for the Italian NDC system based on three control variables: pensions indexation, notional rate and contribution rate. The objective function considers both social adequacy and contribution rate sustainability, under liquidity and sustainability constraints. In the numerical application we apply the model to the Italian pension system and test the sensitivity of the results to different economic scenarios and objective function parameters.

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The transition to NDC in Italy: assessing distributive and financial effects

Journal of Pension Economics and Finance ◽

10.1017/s1474747221000329 ◽

2021 ◽

pp. 1-16

Author(s):

Carlo Mazzaferro

Keyword(s):

Net Present Value ◽

Pension System ◽

Pension Scheme ◽

Defined Benefit ◽

Defined Contribution ◽

Ratio Distribution ◽

Actuarial Fairness ◽

Notional Defined Contribution ◽

High Level ◽

Pension Benefits

Abstract Moving from a Defined Benefit (DB) to a Notional Defined Contribution (NDC) pension formula creates significant re-distributive effects. We estimate the amount and the intensity of these effects in the case of the Italian transition to NDC, which began in 1995. Based on administrative data of the main Italian pension scheme (FPLD), we study the evolution of yearly inequality within old-age pension benefits. Furthermore, we study the adequacy and the actuarial fairness of the pension system, by estimating the replacement rates and the Net Present Value Ratio distribution for workers who retired in the period 1996–2019. Our results show that the very generous interpretation of acquired rights determined by the 1995 reform has contributed to maintaining a high level of adequacy and a significant level of intergenerational imbalance. The financial costs of this imbalance are estimated and its extent is significant.

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Wie hat sich die intragenerationale Umverteilung in der staatlichen Säule des Rentensystems verändert? / Has Intragenerational Redistribution Become Less Important in Pension Systems’ Public Pillar?

Jahrbücher für Nationalökonomie und Statistik ◽

10.1515/jbnst-2011-0205 ◽

2011 ◽

Vol 231 (2) ◽

Cited By ~ 1

Author(s):

Tim Krieger ◽

Stefan Traub

Keyword(s):

Pension System ◽

Defined Contribution ◽

The Public ◽

Pension Systems ◽

Catching Up ◽

Sigma Convergence ◽

Notional Defined Contribution ◽

International Convergence ◽

High Degree ◽

Beta Convergence

SummaryWe empirically investigate whether the significance of intragenerational redistribution in the public pillar of pension systems in 20 OECD countries has changed systematically since the 1980s and whether international convergence of the degree of intragenerational redistribution can be observed. Intragenerational redistribution is measured by the Bismarckian factor which provides information about the relative importance of the earnings-benefit link in the pension formula (as compared to a flat-benefit Beveridgean pension system). Based on micro data from the Luxembourg Income Study, we find both, a trend towards (more Bismarckian) pension systems which obey the principle of participation equivalence and an international convergence of pension systems. The reduced variation of pension systems (sigma convergence) is driven by countries with a high degree of intragenerational redistribution catching up with more traditional Bismarckian countries (beta convergence). Both, fundamental pension reforms as Sweden’s and Italy’s move to „notional defined contribution‘‘ systems, and parametric reforms ranging from the removal of group-specific benefits to alternative calculations of contribution history, such as changing from „best years‘‘ to the entire worklife, underlie this development.

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LIFE CARE ANNUITIES (LCA) EMBEDDED IN A NOTIONAL DEFINED CONTRIBUTION (NDC) FRAMEWORK

Astin Bulletin ◽

10.1017/asb.2015.27 ◽

2016 ◽

Vol 46 (2) ◽

pp. 331-363 ◽

Cited By ~ 9

Author(s):

Javier Pla-Porcel ◽

Manuel Ventura-Marco ◽

Carlos Vidal-Meliá

Keyword(s):

Pension System ◽

Incidence Rates ◽

Fixed Cost ◽

Defined Contribution ◽

Life Care ◽

Term Care ◽

Retirement Pension ◽

Proposed Model ◽

Notional Defined Contribution

AbstractThis paper examines the possibility of embedding public long-term care (LTC) insurance within the retirement pension system, i.e. introducing life care annuities into a notional defined contribution framework. To do this, we develop a multistate overlapping generations model that includes the so-called survivor dividend and give special attention to the assumptions made about mortality rates for dependent persons and LTC incidence rates, which largely determine the contribution rate assigned to LTC. The proposed model could be of interest to policymakers because it could be implemented without too much difficulty, it would universalize LTC coverage with a “fixed” cost, and it would discourage politicians from making promises about future LTC benefits without the necessary funding support.

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The Notional Defined Contribution Pension Scheme and the German ‘Point System’: A Comparison

German Economic Review ◽

10.1111/geer.12127 ◽

2018 ◽

Vol 19 (4) ◽

pp. 365-382 ◽

Cited By ~ 3

Author(s):

Vera Gurtovaya ◽

Sergio Nisticò

Keyword(s):

Pension System ◽

Pension Scheme ◽

Point System ◽

Defined Contribution ◽

Rates Of Return ◽

System A ◽

Analytical Properties ◽

Notional Defined Contribution

AbstractThis paper examines the analytical properties of the German ‘points-based’ pension system. These properties are compared with those of a canonical Notional Defined Contribution (NDC) pension scheme. The paper identifies the circumstances under which the German ‘points-based’ system would mimic a Swedish-type NDC scheme and verifies to what extent the German ‘points-based’ scheme ensures uniformity of individual rates of return for some hypothetical careers. Finally, the paper proposes a set of new possible adjustment rules able to increase similarity between the German point system and the NDC scheme.

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Die finanzielle Entwicklung der Gesetzlichen Rentenversicherung – Simulationsrechnungen mit dem Rentensimulationsmodell MEA-Pensim

Zeitschrift für Wirtschaftspolitik ◽

10.1515/zfwp-2012-0310 ◽

2012 ◽

Vol 61 (3) ◽

Cited By ~ 2

Author(s):

Martin Gasche ◽

Annette Holthausen ◽

Johannes Rausch ◽

Christina Wilke

Keyword(s):

Simulation Model ◽

Labour Market ◽

Federal Government ◽

Pension System ◽

Financial Sustainability ◽

Contribution Rate ◽

Demographic Trend ◽

Future Developments ◽

Benefit Level

AbstractAgainst the background of the demographic trend the German Pension System is faced with the question of its financial sustainability. In order to predict future developments or potential reforms we apply a simulation model for the German Pension System (MEA-pensim), which enables us to replicate the pension system including all its crucial determinants (i. e. the population and the labour market). We present the model and discuss some selected simulations like the effect of different population and labour market developments on the contribution rate as well as the benefit level or the impacts of the proposal by the federal government to extend the supplementary period (Zurechnungszeit) for disability pensions.

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Notional Defined Contribution (NDC) Schemes: a pension system alternative

Revista Mexicana de Economía y Finanzas ◽

10.21919/remef.v16i2.524 ◽

2021 ◽

Vol 16 (2) ◽

pp. 1-18

Author(s):

Gustavo da Costa Morais ◽

Carolina Cardoso Novo ◽

Mirian Picinini Méxas

Keyword(s):

Decision Making ◽

Literature Review ◽

Pension System ◽

Social Impacts ◽

Defined Contribution ◽

Public Officials ◽

Pension Systems ◽

Notional Defined Contribution

This article aims to discuss the main concepts related to notional defined contribution (NDC) schemes and to analyze the experiences of Sweden, Italy, Latvia, Poland and Norway. The methodology is based on a literature review. The main result was that the extent of NDC as a pension system alternative depends on the degree of closeness to the generic scheme. It is recommended to analyze NDC as an alternative for pension system reforms considering its capacity to control structural deficits. As a limitation, it was not analyzed some possible social impacts of NDC introduction. This article is original because encompasses theoretical and practical aspects of NDC schemes. It is expected that this research can contribute to assist public officials in decision-making about reforms in pension systems.

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The impact of notional defined contribution system (NDC) from the point of view of individual

Buhalterinės apskaitos teorija ir praktika ◽

10.15388/batp.2014.15a.8 ◽

2014 ◽

pp. 96-105

Author(s):

Milda Švedienė ◽

Astrida Slavickienė

Keyword(s):

Interest Rate ◽

Pension System ◽

Labour Force ◽

Point Of View ◽

Pension Benefit ◽

Pension Scheme ◽

Retirement Age ◽

Defined Contribution ◽

Notional Defined Contribution ◽

The Impact

Retirement benefit plans are the relevant theme in the world and in Lithuania as well. The demographic challenges such as ageing and shrinking labour force cause the problem which usual PAYG system is not able to solve. Whereas this problem is very important in Lithuania simulation of notional defined contribution system is suggested. The influence of new pension system to individuals is analysed in this paper. The analysis of theoretical works showed that NDC system is defined contribution (DC) system financed as in pay-as-you-go (PAYG) system. This pension scheme is different from others because of it accounting mechanism: contributions of individuals are accumulated on their individual accounts but whereas real capital is not accumulated the balance is notional. All accumulated sum is converted to pension benefit when individuals are at retirement age depending on cohort’s life expectancy. It is said that NDC pension system helps to solve problems such as sensitivity to changes in economic growth, decreasing volume of savings or create a better link between contributions and benefits. Nevertheless it is recognized that benefit return in NDC pension system is less than in usual defined contribution system. The results of simulation have showed that notional defined contribution system in Lithuania would not be the way out from problems in pension system. The system would be balanced in 30-year period and indexation would be acceptable for individuals but from 2040 interest rate would be reduced by the relevant part of the balance ratio. Depending on the changes in interest rate from 2040 notional capital would be less than all sum of contribution paid and it would negatively impact individuals’ finances. It was found that the more years individuals spend in labour market the bigger capital they accumulate and the bigger benefit get when they are at retirement age. Nevertheless it was noticed that replacement rate would be approximately 25 percent and it would not be adequate for the required use of retirees.

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