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It is sometimes argued that firms sponsoring defined benefit pensions are led to take higher risks because pension insurance premiums and funding requirements do not reflect the riskiness of the pension plan portfolio or sponsor bankruptcy risk. This perspective is tested by linking company data on expected default probabilities with newly-available information on pension plan assets. It is shown that moral hazard induced by the current pension insurance environment has influenced corporate pension plan sponsor funding outcomes, even controlling for cash availability. There is no evidence that the share of plan assets invested in equities is related to firm bankruptcy risk or the plan’s contingent claims on the pension insurance entity.

In the private sector, the expansion of the individual account paradigm will continue in the years ahead without significant controversy or impediment. In contrast, there will be increasing contention about public employees' defined benefit coverage as governmental decision-makers emulate their private sector counterparts by embracing individual account plans to shift investment, funding, and longevity risks to public employees. Equally disputatious will be the debate about efforts to expand the use of HSAs, a debate which addresses the fundamental implications of the defined contribution paradigm: the merits of individual ownership and control, the benefits of risk-pooling, the costs of adverse selection, and the distributional consequences of individual accounts. There will be no resurrection of traditional defined benefit pension plans. Even if the advocates of such plans succeed in pruning the regulatory burdens on traditional pension plans, there will be no wholesale return to the classic defined benefit paradigm.

This chapter considers the changing role of the firm in systems of social protection. It does so through an examination of how and why firms have pulled back significantly in their provision of occupational defined benefit pensions, regardless of national traditions. Firms everywhere are largely unwilling to assume long-term liabilities associated with the provision of non-wage benefits. The decline of corporate-sponsored occupational defined benefit pensions is, in part, an outcome of the globalization of financial markets and the globalization of supply chains. Large firms in particular are hardly constrained by their history and geography. Notwithstanding this broader trend, the outcomes of this shift are still contingent on the local institutional environment. Such contingency is demonstrated by comparing the decline and transformation of occupational defined benefit pensions in the United Kingdom and the Netherlands.

The Swedish pension system developed through different stages from the establishment of the first statutory basic pension, the introduction of an earnings-related supplementary pension, and collectively negotiated occupational pensions to the most recent institutional change. A comprehensive pension reform was finally decided in 1994 which led to a switch to an earnings-related insurance with notional defined-contribution (NDC) and a mandatory funded personal pension component (premium pension). In the second pillar, occupational pensions negotiated by employers and trade unions came under financial pressures due to the decline of industrial employment, which led to some restructuring such as the gradual switch from defined-benefit (DB) to defined-contribution (DC) pensions. The chapter also examines the governance and design of these occupational schemes as well as personal pensions.

The Netherlands departed from the Bismarckian social insurance tradition by combining flat-rate public basic pensions with quasi-mandatory, funded occupational pensions with near universal coverage. The emergence, expansion, and reorganization of occupational pensions show their close integration with the public pension scheme. Many efforts helped expand and improve coverage through collective agreements by employers and trade unions. Short case studies of pension funds in the public and private sector highlight the core features of the Dutch system as well as its institutional variation. In the wake of the financial crisis, occupational pensions were scaled back since these defined-benefit (DB) pensions were threatened by underfunding. Current debates question the future viability of the Dutch system in an era marked by both demographic ageing and volatile financials.

This comparative chapter by Ebbinghaus and Neugschwender discusses the institutional differences in the public–private mix, distinguishing mature from emerging multipillar systems and hybrid from dominantly public pension systems. It focuses on exploring the interaction between income inequalities in working life and pension system features for old age income. In particular, it considers the first tier of minimum income support, the public and private second-tier earnings-related pensions, and the particularities of private pensions. The empirical analysis compares poverty rates over time and across countries, discussing the impact of public pensions. The further analysis reveals variations in the recipient rate and income share of private supplementary pensions among the elderly. The importance of mandatory or negotiated occupational pensions in order to reduce inequality in multipillar pension systems is evident in addition to the role of public minimum income protection for poverty reduction.

This comparative chapter by Ebbinghaus and Wiß analyses the governance of supplementary pensions in ten European countries and the scope for state intervention or collective regulation by employers and trade unions. Private occupational and personal pensions combine different features in terms of coverage, benefits, funding rules, supervision, and administration. While the state partially retreated from the public responsibility to finance sufficient and adequate pensions, the need for and importance of state regulation and societal control of private pensions increased. Societal actors like trade unions, employers' associations, and financial services became more important in governing pension systems. Since the pension beneficiaries rely as principals on agents with more financial knowledge, regulation should decrease asymmetric information and limit uneven power distribution. The more pensions are privatized and funded, the more a financial crisis can increase risks for old age income security.

The primary objective of pensions is economic security in old age, achieved through consumption smoothing, insurance, poverty relief, and redistribution. The primary objective of pension design is to optimize old-age security, including the cost of providing it. Pensions can be arranged in different ways, relating to (a) the degree of funding, (b) the relationship between contributions and benefits, and (c) the way benefits and contributions are adjusted over time. The setting for analysis of pensions includes the central role of output, and the facts that imperfect consumer information and decision making are widespread; pension systems face large risks, including economic, demographic, and political risks; and potentially administrative costs can be very high.

A key feature of the pension challenges currently facing Britain is the decline of the system of occupational pensions, particularly the decline of defined-benefit pensions. Here, it is often argued that the villain has been the government (in fact a succession of governments). In this view, over the past decades successive governments have delivered a catalogue of regulation and legislation that, though often well intentioned, has ultimately worked to the detriment of occupational pension provision. Alternatively, one might argue that we could have seen it all coming. It is important that future policy should be set up in a way that is sustainable and robust enough to cope with the huge uncertainty around the increase in life expectancy which we are hoping for. This chapter examines why, and when, things began to go wrong with the financing of British pensions.

This chapter recounts the experience of the Canada Pension Plan Investment Board in designing and implementing its Risk–Return–Accountability Framework and risk budgeting. The implementation of a classic risk budgeting framework integrated with existing processes in the investment group investing in publicly traded liquid assets, but it proved to be problematic for investment groups investing in illiquid assets. Firm risk targets were established for publicly traded investments, but the team developing the risk budgeting program developed risk forecasts to better fit the business model of private investments and real estate.

This chapter discusses developments in managing risks in retirement plans. It begins with a brief analysis on why traditional defined benefit pension plans are being abandoned for defined contribution plans. It identifies key risks affecting both types of plans, and how these can be managed. An overview of the studies included in this volume is then presented.

Cash accounting has been used in national accounts to measure defined benefit (DB) pension plans, but actuarial measures would provide a full picture of household saving and wealth. To make meaningful international comparisons of households’ retirement wealth, actuarial measures of social security are needed. In some countries employer-sponsored DB pension plans are important, while in others retirement income comes almost entirely from social security and similar government-sponsored pension plans. Recent changes to international guidelines for national accounts call for such actuarial measures. We develop methods for incorporating actuarial measures of DB pension plans and social security in national accounts that are consistent with the goals of the international guidelines. We illustrate the new estimates’ usefulness by comparing the US with France. The actuarial measures of the DB pension plans of the US significantly raise estimates of household saving for recent years, and help to close the large gap between the very low saving rate of households that had been reported in the US national accounts and the relatively high saving rate of French households. However when actuarial measures of social security are considered, households in France still have substantially higher ratios of wealth to income than American ones.

Risk disclosure for the insurance industry will be profoundly influenced by Solvency II rules, which embody the new approach to enhance transparency in the European insurance sector. Yet this chapter shows that efforts to extend these reforms to occupational pension funds will confront considerable difficulties. After outlining the recent EU reforms in prudential regulation for insurance undertakings and occupational pension funds, we compare both sectors and describe how differences between both types of institutions might justify differences in risk disclosure. Because of the growing importance of defined contribution pension schemes, risk disclosure for workplace pensions is important for plan sponsors as well as participants bearing investment and biometric risks. Moreover, it will be increasingly valuable for defined benefit pension sponsors and participants seeking to know if their pension funds will ultimately be able to deliver on the retirement promise.

This chapter argues that the federal government should be concerned about state pension liabilities. In the absence of fundamental reform, some large state pension funds may not last through the decade. When the funds run through their assets, the size of promised benefit payments will be so large that raising state taxes enough to make these pension payments will be infeasible. The federal government will therefore face massive and likely irresistible pressure to bail out the affected state governments. The chapter proposes reforming states in pension trouble by closing defined benefit pension plans to new workers, an arrangement called a “soft freeze.” Current employees would continue to earn traditional pension benefits under the existing programs, but retirement benefits for future workers would come under a new defined contribution plan. Once a state or municipal government has stopped unfunded pension liabilities from growing, it becomes more feasible, and less costly, for the state to issue debt to improve its liquidity situation.

Unexpected improvements in mortality rates have led to large unanticipated increases in life expectancy, with accompanying increases in the value of defined benefit pension liabilities. As a result, longevity risk needs to be measured and managed alongside the financial risks facing these plans. The emergence of new instruments for hedging longevity risk means that a complete toolkit is now available for managing these plans in a way that is sustainable over the long term. Decisions to hedge or eliminate longevity risk need to be made in a holistic framework. For corporate pension plans this means taking account of the corporate finance perspective, as well as the interdependencies between the sponsor and the plan. This chapter addresses the importance of measuring and managing longevity risk, and it also presents a holistic framework for sustainable pension plan management that facilitates longevity risk management decision-making.

As global interest rates hover near historic lows, defined benefit pension plan sponsors must grapple with the prospect of lower investment returns. We examine three levers that can enhance portfolio outcomes in a low-return world: increased contributions; reduced investment costs; and increased portfolio risk. We use portfolio simulations based on a stochastic asset class forecasting model to evaluate each lever according to two criteria: the magnitude of impact and the certainty that this impact will be realized. We show that increased contributions have the greatest and most certain impact. Reduced costs have a more modest, but equally certain impact. Increased risk can deliver a significant impact, but with the least certainty.

Plan sponsors in the United States have confronted many challenges managing their pension plans over the past few decades. Traditional generally accepted accounting principles (GAAP) for pensions is an overly complex mechanism, attempting to balance these two often conflicting goals. Especially in the wake of the last financial crisis, analysts will now need to better understand how changes in accounting methods—moving to mark-to-market (MTM) accounting—will shape the reported health of corporate defined benefit pensions. This chapter discusses how to properly account for pension assets and liabilities, and how to provide clarity regarding the plan itself while not diluting insights into the underlying business performance of the corporate plan sponsor.