Assessing Fiscal Costs and the Distribution of Pensions in Transitions to FDC and NDC Systems: A Retrospective Analysis for Chile
Countries assessing structural pension reforms to address problems of financial sustainability and improve economic incentives face the choice between moving to a financial defined contribution (FDC) system, or to a notional defined contribution (NDC) system (or one of its variants). Unfortunately, comparisons regarding the performance of the two systems in terms of the pensions provided and transition costs are normally based on prospective actuarial estimations. In this paper, we follow a retrospective approach by simulating what would have happened in Chile if instead of the original FDC system introduced in 1981, the country would have implemented an NDC scheme. We find that transition costs under an FDC system can be considerably higher than under an NDC. In the case of Chile, other things being equal, introducing an NDC system would have generated fiscal savings during the first 45 years after the reform equivalent to 50% of initial GDP. The cost of the minimum pension guarantee would have been higher under an NDC system that pays the growth rate of the covered wage bill. This is because during the first twenty years after the reform the rate of return on financial assets was higher than the growth rate of wages. Our analysis suggests, however, that this does not have to be always the case. Depending on the assumptions regarding the stochastic process driving the dynamics of the rate of return paid by the FDC system, expected replacement rates under the NDC are not necessarily lower.
Transparency and Competition in the Choice of Pension Products: The Chilean and UK Experience
The growing importance of defined contribution (DC) pension plans is focusing attention on the decumulation or payout phase of pension systems. Where annuitization is encouraged or mandatory, how to ensure that individuals get the best price for annuity products is key. The complicated nature of these decisions means that purchases are highly dependent on the information and advice provided by the sellers of these products. This can be a problem where annuity providers are already involved in the preretirement, accumulation phase, leaving individuals open to abuse if ‘locked-in’ and not able to ‘shop around’ to find a better annuity rate from alternative providers. This paper discusses two countries building centralized information and quotation systems for annuity products to help individuals select the right retirement product at the right price. The SCOMP system in Chile is examined and developments around the Open Market Option (OMO) in the UK are discussed, with lessons drawn for other pension supervisory authorities contemplating introducing such centralized systems.
Forms of Benefit Payment at Retirement
This paper focuses on describing the international practice on the various forms of retirement benefit payment currently allowed in countries throughout the world and the regulatory environment surrounding these different forms of benefit payment. The analysis suggests considerable variance between countries. Some countries only allow one form of retirement payment, while others allow several forms or even a combination of them. Examining country practices as regard the providers of benefit payments, suggest that lump-sums and programmed withdrawals are generally provided by pension funds; while, as regard life annuities, providers varied from insurance companies, to pension funds, financial intermediaries and a centralised annuity fund. The paper ends by examining the role of taxation where a choice between different types of benefit payments is allowed. Tax provision plays a key direct or indirect role in influencing payout options. Cross country evidence is varied but suggests that there is often an unequal tax treatment of the various forms of retirement payout options. Les differentes formes de prestations de retraite Pour l‘essentiel, ce document decrit les pratiques internationales en vigueur concernant les formes de prestations de retraite actuellement autorisees dans le monde, ainsi que les dispositifs reglementaires qui les regissent. Cette analyse fait ressortir de profondes disparites entre les pays. Certains n‘autorisent en effet qu‘un seul type de prestations, alors que dans d‘autres, plusieurs formules peuvent etre envisagees, voir associees. S‘agissant des prestataires, l‘examen des pratiques nationales tend a montrer que les sorties en capital et les retraits programmes sont generalement proposes par des fonds de pension, alors que les rentes viageres sont servies par des compagnies d‘assurance, des fonds de pension, des intermediaires financiers ou une caisse de retraite centralisee. Ce document s‘acheve sur une analyse du role joue par la fiscalite lorsque plusieurs types de prestations sont possibles. Les dispositions fiscales exercent alors directement ou indirectement une influence decisive sur le choix des modes de sortie. Les donnees comparatives concernant les differents pays sont heterogenes, mais laissent supposer que les divers modes de sortie sont rarement soumis au meme regime fiscal.