Innovative Institutions and Products
for Retirement Provision in Europe
Lans Bovenberg and Theo Nijman
Riccardo Calcagno
VU University Amsterdam
Torino, September 2008
A short summary
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The starting point: pension systems are under reform
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From unfunded plans (PAYG) to funded schemes
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New challenges:
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Transition period
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Collective vs. individual plans
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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
2
A short summary
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Are individuals able to implement the first best?
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Financial illiteracy
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Hyperbolic discounting (time inconsistency)
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Under-diversification (access to capital markets may be
excessively costly)
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How can collective plans improve on individual choices?
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DB, DC or “hybrid” plans?
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Gaps in the literature
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Human capital is risky
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Liquidity constraints
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Hedge of systematic risk
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A description of the Dutch “stand-alone” collective schemes
Recommendations about European research infrastructure and
networks
Lugano, May 23
3
My interpretation and questions
Individual choice is optimal under strong assumptions
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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
4
My interpretation and questions
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Difficulties in creating fully funded DB plans: regulation may
not be too strict?
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Lugano, May 23
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
5
Three lines of research
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Markets and institutional frictions
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Agency issues
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New financial instruments and market design
Governance / creation of new institutions
Individual “biases”
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Experiments