Biggs: The state of public pension funding – Are government employee plans back on track?

Abstract:

The public-sector pension industry is claiming a comeback from losses suffered during the Great Recession. But this recovery is greatly exaggerated: even years past the end of the recession, most pension sponsors are unable to make their full annual contributions, and pensions are taking as much investment risk as ever. The first step to effective pension reforms is an honest, accurate view of the costs and risks that public plans impose on government budgets and taxpayers.

Available for download here.

 

Lebedeva & Feiguine: The Pension Systems in the Group of Seven Countries – The Current State, Prospects of Development, and References for Russia

Abstract:

This article discusses the pension systems in the member states of the Group of Seven (G-7). A comparative analysis of pension protection is provided. The emphasis is made on the basic to funded components ratio. The options for pension reforms are also considered. Based on the G-7 countries’ experience study, a conclusion is made on the prospects of reforming the pension system in Russia.

Available for download here.

Strünck: Public pushing for pension reform? The short-term impact of media coverage on long-term policy making in Germany, Britain and the United States

From the chapter:

Pension reform has been on the agenda in Western welfare states for two decades now. However, the mass media rarely scoop with these issues. This is because pension politics is mostly confined to policy networks that deal with technically complex questions and have established enduring relationships. Pension politics means long-term policy making that affects present and future generations, too. This is why in most democracies party competition is low and consensus building high when it comes to tinkering with pension schemes. But new ideas have emerged that can help to bypass the complexity of pension systems. Privatization of public pension stands at the forefront of these ideas which are evenly spread across different countries and welfare states. In Germany, Britain, and the United States, governments have tried to enact laws that boost private savings.

This chapter does not aim to trace the ideological heritage of privatization in pension politics. It raises questions on the role of mass media and public opinion in shaping pension reforms. How do media coverage and public opinion shape a policy which is often deeply rooted in secretive, consensus-oriented institutions? Is long-term policy making substituted by rather short-term activities of governments? Do certain actors gain more influence when pension reform turns into a high key issue in the mass media?

Available for download here.

McGee (Manhattan Institute): Defined-Contribution Pensions Are Cost-Effective

Executive Summary:

In recent decades, U.S. private-sector employers have increasingly offered retirement benefits through defined-contribution retirement (DC) plans. The share of workers who are offered a retirement plan through their employer and who participate only in a DC plan has increased—from 16 percent in 1979 to 69 percent in 2011. Yet the vast majority of American public-sector workers (75 percent) still earn retirement benefits under a defined-benefit retirement (DB) plan. The relative merits of DC plans and DB plans have long been debated. Many public-sector employers have recently considered placing new employees in a DC plan; but only two states, Michigan and Alaska, as well as a handful of cities, currently use a DC plan as the primary retirement savings vehicle for new employees. When state and local governments have considered adopting a DC plan for new employees, they have encountered significant opposition from organized labor, managers of current public-retirement systems, and the cottage industry of consultants that supports public DB plans. Critics of DC plans argue that DB plans are more cost-effective because the latter deliver higher investment returns and convert retirement savings into annuities. This paper investigates whether such assertions hold up to empirical scrutiny.

Key findings include:

1. DB plans are not structurally more cost-effective than DC plans. Claims of the superior efficiency of DB plans—underpinned by false assumptions and a neglect of pension debt as a significant cost driver—are not supported by empirical evidence.

2. DC plans achieve similar investment returns. Between 1995 and 2012, average estimated ten-year performance differences between DB and DC plans—at the mean, median, 25th, and 75th percentiles—were less than half a percentage point and were generally not statistically significant. Bottom-performing DB plans outperformed bottom-performing DC plans; top-performing DC plans outperformed top-performing DB plans. Since 2000, performance differences have further narrowed.

3. DC plans can—and do—offer annuities. The limited availability of annuities among private-sector DC plans is largely the result of misguided federal regulation discouraging their provision. Nevertheless, a number of private-sector firms provide annuities under their DC plans. And most public-sector employers—which do not face regulation hostile to annuities—provide annuities at favorable prices under their DC plans.

4. Pension debt is a significant cost driver for DB plans. DC plan critics generally ignore the cost of carrying pension debt—one of DB plans’ largest cost drivers—in their DC-DB plan comparisons. For example, carrying a pension debt equal to 10 percent of liabilities would increase annual cost as a percentage of payroll by around 70 percent; carrying a debt equal to 20 percent of liabilities would increase annual cost by around 140 percent.

5. DC plans are a good option for providing retirement security. Most current DC plans include a number of plan features—including well-designed, diversified, professionally managed investment products—that automatically place participants on a secure retirement path. DC plans can also solve many of the political-economy and benefit-design problems associated with DB plans.

Available for download here.

Lachowska & Myck: What Is the Relation between Public Pensions and Private Savings?

From the paper:

Pension systems where current pension benefits are financed by current revenues, also known as pay-as-you-go systems, are vulnerable to demographic changes such as increased longevity and declining fertility. In part because of lower birth rates in the United States, a 2014 Social Security Board of Trustees report projects that by 2033, the costs of Social Security programs will increase so that revenues will pay for only about 77 percent of scheduled benefits (U.S. Government Printing Office 2014).

To deal with such demographic changes, over the past 20 years many European countries, including Italy, Poland, Sweden, and Germany, have reformed their pension systems (see, for example, Szczepański and Turner [2014]). A common theme of pension reforms has been to change the design of future pensions in order to encourage people to work longer and save more for retirement. Such reforms provide an opportunity to estimate whether, in response to lower future pensions, people save more on their own, or, equivalently, to answer whether pay-as-you-go public pensions crowd out private saving. The public pension crowd-out is an important policy parameter, because it tells us how much people would save on their own if Social Security benefits were lowered.

Available for download here.

Ebbinghaus: The Privatization and Marketization of Pensions in Europe – A Double Transformation Facing the Crisis

Abstract:

In response to the demographic challenges and fiscal constraints, many European welfare states have moved toward the privatization and marketization of pensions in order to improve their financial sustainability. The privatization of retirement income responsibility has led to a shift from dominantly public pensions to a multi-pillar architecture with growing private pillars composed of personal, firm-based, or collectively negotiated pension arrangements. At the same time, marketization has led to the introduction and expansion of prefunded pension savings based on financial investments as well as stronger reliance of market-logic principles in the remaining public pay-as-you-go (PAYG) pensions. However, there are also important cross-national variations in the speed, scope, and structural outcome of the privatization and marketization of European pension systems. Liberal market economies, but also some coordinated market economies (the Netherlands and Switzerland) as well as the Nordic countries have embraced multi-pillar strategies earlier and more widely, while the Bismarckian pensions systems and the post-socialist transition countries of Eastern Europe have been belated converts. The recent financial market and economic crisis, however, indicates that the double transformation may entail short-term problems and long-term uncertainties about the social and political sustainability of these privatized and marketized multi-pillar strategies.

Available for download here.

Lachowska & Myck: What Is the Relation between Public Pensions and Private Savings?

From the article:

Pension systems where current pension benefits are financed by current revenues, also known as pay-as-you-go systems, are vulnerable to demographic changes such as increased longevity and declining fertility. In part because of lower birth rates in the United States, a 2014 Social Security Board of Trustees report projects that by 2033, the costs of Social Security programs will increase so that revenues will pay for only about 77 percent of scheduled benefits (U.S. Government Printing Office 2014). To deal with such demographic changes, over the past 20 years many European countries, including Italy, Poland, Sweden, and Germany, have reformed their pension systems (see, for example, Szczepański and Turner [2014]). A common theme of pension reforms has been to change the design of future pensions in order to encourage people to work longer and save more for retirement. Such reforms provide an opportunity to estimate whether, in response to lower future pensions, people save more on their own, or, equivalently, to answer whether pay-as-you-go public pensions crowd out private saving. The public pension crowd-out is an important policy parameter, because it tells us how much people would save on their own if Social Security benefits were lowered.

Available for download here.

Morena, Furness and Truppi: A Cross-comparison analysis of the UK and Italian pension funds – the real estate asset class in the portfolio investment

Abstract:

Pension funds could be considered as institutional investors who have particular goal for those people retiring. Albeit with different weights, they play an important role in the pension system of many western countries both in terms of reaching financial sustainability and social security. As OECD reports, in 2013, pension funds confirmed their growing importance amongst institutional investors. With different features UK and Italians pension funds fit itself into this scenario, representing in 2013, respectively, 105,78% and 6,14% asset-to-GDP ratios. Amid the asset class in portfolio of pension funds, the real estate asset is the most important alternative as demonstrated by numerous scientific publications.

With this is mind, this work aims to highlight and show differences that incur between two samples of pension funds in the UK and Italy, in the allocation of real estate asset class of their portfolio. Particular attention has been given to the space of real estate asset class, the different instruments and location and type of property investments in both samples.

In order to achieve these objectives, two samples have been analysed, preceded by a brief explanation of the different pension system current in UK and Italy. For the first sample, this study analysed the top 20 biggest pension funds in UK, while the second sample comprises 10 pre-existing pension funds in Italy. Data is collected from annual reports available on pension funds website and refers to five years, 2009-2013.

Among the first evidence emerged, there is certainly the general asset evolution common to the two samples, albeit with obvious differences in terms of absolute growth and portfolio diversification. Then, it is possible to see the different allocation of property asset in the portfolio investments, with a greater propensity to historical real estate asset class and a recent reduction of properties for the Italian sample compared to UK, where there is a substantial unchanged over the years. Finally, after having seen a growing trend of investment in real estate funds in both cases, it can also be observed that there is a common propensity to invest exclusively in the national territory and specifically in commercial buildings.

Available for download here.

Kitao: Pension Reform and Individual Retirement Accounts in Japan

Abstract:

The paper studies the effects of introducing individual retirement accounts (IRA) as an alternative to the employer-based, pay-as-you-go public pension system in Japan. Without any reform, the projected demographic transition implies a massive increase in government expenditures in the magnitude of 40% of total consumption expenditures at the peak. Gradually shifting the earnings-related part of pension towards self-financed IRA, expenditures can be reduced by 20% of total consumption, providing a major relief for the government budget. The reform generates a significant rise in capital, as individuals save more for retirement, which is invested over many years. As a result, wage, output, and consumption are also higher, leading to a sizeable welfare gain in the intermediate and long run. Current generations, however, can face a large welfare loss depending on how the transition is financed.

Available for download here.

Monk, Kearney, Seiger & Donnelly: Energizing the US Resource Innovation Ecosystem

From the Executive Summary:

By 2050, the world population is forecasted to reach 10 billion people, and consumption of natural resources is expected to increase four-fold above current rates. Radical resource innovation – across energy, agriculture, water, and waste – is required to prepare the world for this future. Without it, we risk irreversible climate change, military conflict over resource access, and deepening inequity in the developing world.

Paradoxically, there are no shortages of breakthrough technologies being developed in universities, national labs, and garages that could be as transformative today as the steam turbine in the 19th century or the solar cell in the 20th.  What there is a shortage of, however, is patient, early-stage capital to support the transformation of these projects into lasting, profitable companies. Even growth-stage companies in this space sometimes lack access to project capital to execute first-of-a-kind demonstrations and deployments, and to achieve price competitiveness at commercial scale. In short, preventing a climate catastrophe demands that we create a new investment toolkit that can help bridge the “valleys of death” faced by these companies.

We thus believe that the resource innovation ecosystem could benefit from the creation of a new aligned intermediary (“AI”). The AI, detailed below, is designed to be a uniquely aligned financial services organization whose mission would be to specifically help Long-Term Investors (“LTIs”) – such as pensions, endowments, sovereign funds, family offices, and foundations – identify, screen, assess, and invest in high-potential companies that are producing the most impactful, and indeed profitable, solutions to climate change.

Available for download here.