Linking Pensions to Life Expectancy: Tackling Conceptual Uncertainty through Bayesian Model Averaging

Linking pensions to longevity developments at retirement age has been one of the most common policy responses to pension schemes and aging populations. The introduction of automatic stabilizers is primarily motivated by cost containment objectives, but there are other dimensions of welfare restructuring in the politics of pension reforms, including recalibration, rationalization, and blame avoidance for unpopular policies that involve retrenchments. This paper examines the policy designs and implications of linking entry pensions to life expectancy developments through sustainability factors or life expectancy coefficients in Finland, Portugal, and Spain. To address conceptual and specification uncertainty in policymaking, we propose and apply a Bayesian model averaging approach to stochastic mortality modeling and life expectancy computation. The results show that: (i) sustainability factors will generate substantial pension entitlement reductions in the three countries analyzed; (ii) the magnitude of the pension losses depends on the factor design; (iii) to offset pension cuts and safeguard pension adequacy, individuals will have to prolong their working lives significantly; (iv) factor designs considering cohort longevity markers would have generated higher pension cuts in countries with increasing life expectancy gap.

Enhancing Pension Adequacy While Reducing the Fiscal Budget and Creating Essential Capital for Domestic Investments and Growth: Analysing the Risks and Outcomes in the Case of Greece

Many countries around the world are resorting to mandatory funded components in their multi-pillar pension systems with the purpose of catering for the financial pressure from ageing. This paper aims at analysing the possible replacement rates for such a scheme, by choosing different assumptions and setting the best combined area for the expected result. Then, an approach for analysing the potential for the implementation of such a scheme in Greece is presented along with the actuarially projected expected benefit expenditure and respective accrued capital. A result of the introduction of such a component is expected to be the elevated replacement rate at retirement with a concurrent alleviation of the fiscal burden for the state. The projected scale of savings will also provide domestic financing for investments generating growth.

The problematic nature of UK pension fund regulation: Performing governance at the expense of innovation

At the heart of UK pension fund regulation are quasi-compulsory codes of practices and tests of pension fund trustees’ competence. This regime of ‘soft’ regulation focuses upon the ‘performance’ of governance and is intrusive in terms of expected behaviour and board decision-making. Framed by defined benefit pension obligations in the private sector, it lacks rigorous standards of value when applied to defined contribution pensions. As such, pension ‘adequacy’ is discounted by the premium placed on performing governance in the market for financial services. The UK pension regime has hit a dead-end being neither fit-for-purpose in a world of technological disruption and financial turmoil nor capable of empowering those funds willing and able to innovate in the best interests of participants.

Replacement rate as an instrument of analysis and forecasting of pension system

The article examines one of the main indicators of pension adequacy the replacement rate. The importance of using this indicator for pension system management is substantiated. A methodology for determining theoretical and empirical replacement rates is proposed in relation to the peculiarities of the Russian system of compulsory pension insurance. The article presents the results of calculations carried out on the model of the theoretical replacement rate developed by the authors, according to which, in the current Russian conditions, the replacement coefficient for an employee with a median wage and average length of service is more than 40%, which corresponds to the international criteria for the sufficiency of pensions for this indicator. However, with higher wages, for example, equal to the average for Russia and above, there is a lag behind the level of most EU countries. Modeling shows that in 2002—2018, there was an increase in the differentiation of pensions and replacement rates depending on wages. The performed forecast calculations for the period up to 2050 have revealed the following trends: a decrease in replacement rates for recipients of minimum and median salaries, approximate stabilization for average salaries and growth for recipients with high salaries. The article provides a number of examples of using the theoretical replacement rate for the analysis of the pension system in terms of the effect on the level of pensions: participation in the formation of pension savings, valorization, years of the insurance period, etc.

The Impact of the Flexibilization of Employment Histories on the Pension Adequacy in Poland

Flexibilization of employment history is a sign of our time. One of the real consequences of this phenomenon is the risk of a decrease in the level of future pension benefits, which can lead to the deprivation of pension system sustainability. Subsidies from the state budget will be necessary to the inadequate pensions. The paper aims to present how changes in earnings and employment breaks, caused by flexibilization of employment history, will impact the adequacy of pension benefits in Poland. In the research, different scenarios of employment history have been considered. As the method of research, we have used one of the data mining tools—the classification tree method with CART (Classification and Regression Trees) algorithm. The obtained results have shown a crucial role of stable individual promotion of earnings. Significant also is the level of earnings. The lower earnings can be compensated by long periods of seniority or by higher retirement age. Any breaks in work will lead to a reduction in the level of pension benefits and difficulties in maintaining adequacy. The suggestion from the study is that even if you are unemployed or receive a low salary, you should leave at least a low contribution to the pension system.

Adequacy Analysis of the Basic Old-Age Pension System Based on Local Administrative Data in China

There is no consensus on the judgment of the adequacy status of the old-age pension benefit in China at present. Therefore, clarification of various types of indicators and benchmarks of pension adequacy is urgently needed. According to the theoretical development of pension adequacy, this paper offers a comprehensive analysis of the benefit level of basic pension from the perspectives of poverty alleviation, income substitution, and financial sustainability. The calculation results based on local administrative data show that the current pension benefit in urban China is unbalanced: on the one hand, the average pension level of self and flexible employees cannot keep track of the local average consumption level or even the relative poverty standard in particular years and the individual replacement rates for a few nonstandard employees are less than the minimum standard of 40% set by the International Labor Organization, which means the pension benefit performs poorly in terms of consumption smoothing. On the other hand, the lifelong pension rights are much higher than the lifelong contribution obligations for new retirees. Under the trend of population ageing, the extremely high benefit–cost ratio means that the current retired generation is eroding the welfare of the current working generations, and the long-term financial sustainability of the pension system is facing challenges. In the future, in order to improve the benefit level of the basic old-age pension system in a sustainable way, we need to increase the average and individual replacement rates and reduce the benefit–cost ratio by consolidating contribution bases and delaying the number of contribution years.

POLICY AND ECONOMIC INFLUENCES ON RETIREMENT, FINANCIAL LITERACY, AND ECONOMIC SECURITY IN JAMAICA

The changing pension landscape, as well as the accompanying privatization, marketization and individualization of the pension planning process, has resulted in inadequate and risky investment practices. Jamaica, like many other countries in the international community, has been engaged in pension reform. The main issues in the current dispensation of pension reform are in relation to pension adequacy to mitigate against longevity risk, low levels of pension coverage; with the aforementioned leading to the need to increase the number of persons contributing to the pension pool as well as possibly an increase in the value of pension contributions to account for inflation and investment risks. This paper describes the current legal and regulatory framework on pension reform in Jamaica within the context of population ageing and the National Financial Inclusion Strategy that targets persons who were previously underserved by the domestic financial system. Policy and programmatic recommendations are will be provided.

Informality and the Challenge of Pension Adequacy

Past reforms have put the Peruvian pension system on a largely fiscally sustainable path, but the system faces important challenges in providing adequate pension levels for a large share of the population. Using administrative microdata at the affiliate level, we project replacement rates in the defined benefit (DB) and defined contribution (DC) pillars over the next 30 years and simulate the impact of various reform scenarios on the average level and distribution of pensions. In the DB pillar, the regressive minimum contribution period should be re-thought, while in the DC pillar a broadening of the contribution base and/or an increase in contribution rates would help increase replacement rates relative to the baseline forecast of 25-33 percent. A higher net real rate of return than assumed in the baseline would also have a significant positive impact. In the medium-term, labor market reform to tackle informality, and a broad pension reform to restructure the system and avoid competition between the DB and DC pillars should be a priority. Given low pension coverage, having a strong non-contributory pillar will remain important for the foreseeable future.