"Comparing Retirement Income Systems Through an Index" 

Rotman International Journal of Pension Management, Vol. 3, No. 1, 2010

DAVID KNOX, affiliation not provided to SSRN

There is a great variety of retirement income systems around the world, but which ones are producing good outcomes? Which ones are sustainable into the future? The Melbourne Mercer Global Pension Index considers more than forty indicators in calculating an index value for the systems in eleven countries spread over five continents. In this first-ever broad-based comparison, none of the eleven countries receive an ‘A’ grade. At the other end of the quality spectrum, none receive a failing ‘E’ either. However, the actual grade range from ‘B’ to ‘D’ reflects material differences in the quality of the eleven retirement income systems as measured by the Index.

"A Life-Cycle Approach in the Dutch Occupational Pension System?" 

Rotman International Journal of Pension Management, Vol. 3, No. 1, 2010

DIRK BROEDERS, De Nederlandsche Bank
Email: d.w.g.a.broeders@dnb.nl
DAVID R. RIJSBERGEN, Bank of the Netherlands - Supervision - Strategy
Email: D.R.Rijsbergen@dnb.nl

The recent global financial crisis reconfirms the importance of risk management in defined benefit pension systems. To enhance sustainability, new forms of integrating the risk profiles of assets and liabilities should be considered. Specifically, by reducing the risk profile of assets, by transferring more risk to the beneficiaries, or through a combination of the two. This article provides a stochastic analysis of different strategies that gradually switch from risky to risk-free investments over the life-cycle. While the study is set in a Dutch institutional context, its findings have broad application.

"Incorporating Employee Heterogeneity into Default Rules for Retirement Plan Selection" 

Boston College Center for Retirement Research Working Paper No. 2010-6

GOPI SHAH GODA, Stanford University
Email: gopi@stanford.edu
COLLEEN FLAHERTY MANCHESTER, University of Minnesota
Email: cmanch@umn.edu

This paper examines the effect of incorporating individual-level heterogeneity into default rules for retirement plan selection. We use data from a large employer that transitioned from a defined benefit (DB) plan to a defined contribution (DC) plan, offering existing employees a choice of plans. Employees who did not make a choice were defaulted to switch to the DC plan if under age 45 or remain in the DB plan if age 45 or older. Using a regression discontinuity framework, we estimate that the default increased the probability of enrolling in one plan over the other by 60 percentage points. We develop a framework to solve for the optimal age-based default rule analytically and use our results to empirically evaluate the optimal age-based default rule for the firm in our setting. We show that for a broad range of levels of risk aversion, conditioning the default for the choice between pension plans on age can substantially improve outcomes relative to a uniform default policy. Our results suggest that considerable welfare gains are possible by varying defaults by observable characteristics.

"The Shrinking Tax Preference for Pension Savings: An Analysis of Income Tax Changes, 1985-2007" 

GARY BURTLESS, Brookings Institution, Boston College - Retirement Research Center
Email: GBURTLESS@BROOK.EDU
ERIC J. TODER, Urban Institute
Email: etoder@urban.org

The value of the tax preference for pensions depends on the marginal tax schedule and on the tax treatment of income from assets held outside a pension account. We examine the change over time in the value of pension investing, accounting for changes in the tax schedule and in the treatment of equity and bond income. We find that changes in U.S. tax law, especially the treatment of equity income, have led to sizeable changes in the value of the pension tax preference. On balance the value of the pension tax preference to worker-savers is modestly lower than it was in the mid-1980s and substantially lower than it was in the late 1980s.

"Employee Share Schemes: Regulation and Policy" 

INGRID LANDAU, University of Melbourne - Law School
Email: imlandau@unimelb.edu.au
ANN O'CONNELL, University of Melbourne - Law School
Email: a.oconnell@unimelb.edu.au
IAN RAMSAY, University of Melbourne - Law School
Email: i.ramsay@unimelb.edu.au

Through employee share schemes, employees have the opportunity to take up equity in the company for which they work. There are two distinct types of employee share schemes: ‘broad-based’ schemes that are open to the majority of employees within a company, and ‘narrow-based’ schemes that are only open to executive employees. Broad-based schemes - the focus of this paper - are an increasingly common and economically significant feature of the Australian corporate landscape. At the federal government level, they have been the focus of intermittent public policy interest. Most recently, as part of the 2009-10 Budget, the Treasurer announced significant changes to the taxation of these schemes. This announcement was met with outcry from a range of stakeholders and the Government was quick to concede that its proposals may have had the unintended consequence of discouraging the growth of broad-based employee share ownership in Australia. After a series of consultative measures, the Government substantially revised its reforms.

Although broad-based employee share schemes have long enjoyed bipartisan political support, key issues surrounding their regulation continue to be contested. This paper identifies and discusses a number of these important policy issues, with particular reference to the recent major taxation reforms. Part II of the paper provides background by briefly outlining current evidence on broad-based employee share schemes in Australia. In Part III, we explain the extent to which these schemes have received support from Australia’s two major political parties. Part IV briefly outlines how these schemes are regulated under Australian law. In Part V, we discuss a number of important public policy issues which recur intermittently in public debates on employee share schemes. These issues include our limited knowledge of relevant company practice; the many available rationales for the promotion of employee share schemes; the nature, and extent, of the tax concessions designed to promote employee share ownership; and the extent to which the existing regulatory regime provides scope for loss of revenue through tax evasion. We conclude in Part VI by observing that although all political parties support the notion of employee ownership, the political will to support this with taxation concessions is tempered by the view that employee share schemes present the potential for abuse.

"Back to the Future: A Long Term Solution to the Occupational Pensions Crisis" 

CHARLES SUTCLIFFE, University of Reading - ICMA Centre
Email: C.M.S.Sutcliffe@rdg.ac.uk

In the UK and elsewhere, defined benefit (DB) schemes are being replaced by defined contribution (DC) schemes. However DC schemes have some substantial weaknesses, and a continuation of current policies will probably lead to another pensions crisis in a few decades. There is an alternative which avoids the major defects of DC schemes. It is proposed that, if UK employers wish to replace their DB schemes, they should do so with something that looks like a career average revalued earnings (CARE) DB scheme to the members, but is funded by single premium deferred annuities (SPDAs) and looks like a DC scheme to the employer. Pension provision is outsourced to specialist providers (insurance companies), with the risk (and the decisions that must be made by members of a DC scheme) managed by insurers, not the employer or members.