Working Paper: CEPR ID: DP10538
Authors: A. Lans Bovenberg; Theo E. Nijman
Abstract: Private pension provision faces the challenging task of providing stable income streams during retirement. The challenge has increased markedly in the last decades due to volatile financial markets, falling interest rates and the withdrawal of employers and external insurers as risk bearers of systematic financial and longevity risks. Partly because of these developments, policyholders desire pensions tailored to their individual needs. This paper proposes a new type of pension: the Personal Pension with Risk sharing (PPR). By unbundling and valuing the investment, (dis)saving, insurance and risk-sharing functions of pensions, PPRs allow risk management and (dis)saving to be customized to the specific features of heterogeneous individuals. Moreover, unlike variable annuities, PPRs allow investment risks to be combined with longevity insurance without giving rise to high year-on-year volatility in consumption streams or opaque and rigid valuation and smoothing rules. The unbundling of functions in the PPR also deepens the internal markets for financial and insurance products while at the same time accommodating the diverse traditions of countries in terms of occupational pension provision. Finally, the PPR reconciles financial, fiscal and macroeconomic stability with growth by increasing the supply of long-term risk-bearing and illiquid capital, complementing public retirement provision, reducing the interest-rate sensitivity of pensions and smoothing shocks.
Keywords: decumulation phase; defined benefit; defined contribution; longevity insurance; private pensions; risk management; risk sharing; variable annuities
JEL Codes: D14; D91; E21; E62; G11; G22; G23; G28; H31; H55; J14; J18; J26; J62; P43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| personal pensions with risk sharing (PPRs) (H55) | stable income streams during retirement (J26) |
| personal pensions with risk sharing (PPRs) (H55) | income security, affordability, and adequacy (H55) |
| personal pensions with risk sharing (PPRs) (H55) | manage risks more effectively than traditional defined benefit (DB) or defined contribution (DC) plans (G52) |
| personal pensions with risk sharing (PPRs) (H55) | earn risk premiums on systematic risks (G12) |
| personal pensions with risk sharing (PPRs) (H55) | provide longevity insurance without the volatility associated with conventional annuities (G52) |
| personal pensions with risk sharing (PPRs) (H55) | enhance financial stability and growth (O16) |