Torino, September 2008 Innovative Institutions and Products for Retirement Provision in Europe Lans Bovenberg and Theo Nijman Riccardo Calcagno VU University Amsterdam

Lugano, May 23 2 A short summary The starting point: pension systems are under reform From unfunded plans (PAYG) to funded schemes  New challenges: Transition period Collective vs. individual plans DB vs. DC plans: optimal risk sharing Start looking at a base life cycle model to define a “first best” allocation of saving and risk Compute the welfare losses due to market incompleteness / financial constraints

Lugano, May 23 3 A short summary Are individuals able to implement the first best? Financial illiteracy Hyperbolic discounting (time inconsistency) Under-diversification (access to capital markets may be excessively costly)  How can collective plans improve on individual choices? DB, DC or “hybrid” plans? Gaps in the literature  Human capital is risky  Liquidity constraints  Hedge of systematic risk A description of the Dutch “stand-alone” collective schemes Recommendations about European research infrastructure and networks

Lugano, May 234 My interpretation and questions Individual choice is optimal under strong assumptions  When individual cannot implement the “first best” collective plans may improve welfare  However, simple individual plans (e.g. DC with constant premia) are not the solution Methodology (BKNT): compute welfare losses due to a “friction” from the first best Force individuals into collective plans: DB vs. DC

Lugano, May 23 5 My interpretation and questions Difficulties in creating fully funded DB plans: regulation may not be too strict?  New accounting rules  Mark to market obligations “Hybrid” plans are better; Collective plans are not “tailor-made”: good for the “average” individual? Agency issues (even in independent trusts as the Dutch stand-alone funds);  More severe agency issues in traditional DB funds  Risk-taking by companies who have a claim on possible surplus in the fund

Three lines of research  Markets and institutional frictions New financial instruments and market design  Agency issues Governance / creation of new institutions  Individual “biases” Experiments