1. The Evolution of Retirement Income Systems: DB, DC and Shared Risk
Presentation to the 9th Transatlantic Conference
Montreal, Quebec
May 10, 2017
Bob Baldwin

2. Introduction Interpretation of my mission (which I chose to accept)
Discuss pension reform with particular focus on how reforms affect the balance among DB, DC and TB plans
Place greater emphasis on general lessons/conclusions versus details of reform
Hopefully of some help in interpreting the presentations that will follow and in interpreting events in your home countries
I will tend to be OECD and Canada centric

3. General Comment on Reforms
Continuous process of reform since mid 1990s
Reform in all 34 OECD country
Still ongoing (biennial reviews)
Reforms are multi-dimensional
Reforms involve a shift away from DB toward DC in pillar 2 and 3
Reforms have been driven by concerns about the impact of ageing
Increased contributions
Pension costs and government budgets
Stable plan rules do not mean stable outcomes

4. OECD Three Pillars Pillar Key Characteristics Prevalence Pillar 1
Publicly administered
Financed from general revenues (usually)
Benefits based on age and length of residence and may be means or income-tested
30 of 34 have 1st pillar
Pillar 2
Mandatory earnings-related plan – includes privately administered plans that are required through legislation and/or collective bargaining
32 of 34 have pillar 2 plans
12 involve mandatory private administration – including Netherlands
Pillar 3
Privately administered
Voluntary for employers and/or individuals
(Prefunded, regulated and tax-supported)
Important in: Belgium, Canada, Germany, Ireland, New Zealand, UK and US

5. Some Similarities and Differences
Maturity reached after WW II
Pillars 1 and 2
DB before reforms
financed on pay-as-you go basis
Balance between pillars 2 and 3: a big point of difference
“Anglo liberal” approach: emphasize pillar 1 with modest (or no) pillar 2
Alternative approach: stronger pillar 2
Pillar 3 tends to be residual and its importance varies widely
More important in “Anglo liberal” approach

6. Reforms to Pillars 1 and 2: Overview
Increase age of eligibility (most common)
Reduce initial benefits
Reduce indexation
Thematic
Increase prefunding
Rebalance from pillar 2 to 3
Coverage initiatives
Broadly based: NZ, UK and Canada
Focused: e.g. France, Finland

7. Shift Away from DB Pillar 2
Mandatory DC accounts
Displace older pillar 2 plans (Australia + mainly outside OECD)
Complement other pillar 2 programs
Introduction of Notional DC
Combines elements of DB and DC
Main pillar 2 program in 4 OECD countries
Experimentation in the Netherlands
Conditional indexation, collective DC, ...
Other contingencies
Age of eligibility based on life expectancy (e.g Finland, Spain)
Indexation linked to funding status (Canada)

8. Shift Away from DB Pillar 3
Major shift in WPPs in Canada, UK and US
Contingency in Canadian DB (recent)
DB with contingent indexation in provincial public sector
Mixing DB, DC and contingent benefits not new:
MEPPs an important case in point
Controversies over TB
DB and DC: spectrum versus binary choice

9. Concerns about the Shift to DC
Many concerns, pre-eminent
Predictability of benefits
Level of contributions
Note role and interactions
The obvious: where whole system is DC the impacts will be greater than if a tranche is DC
Where strong pillar 1 programs are in place, impacts will increase with earnings
Where pillar 1 programs are income (means) tested, impacts will be moderated for low income pensioners
PIT will also moderate impacts
Note: future fiscal impacts
Will play out differently in different contexts
Think of US, Netherlands, Canada

10. Concluding Remarks: Pensions as a Balancing Act
Adequacy versus affordability
In pillar 1, affordability is largely an issue of budgetary limitations
In pillars 2 and 3 it is an issue of balancing pre-retirement sacrifice with post-retirement income
Competing virtues: predictable benefits and predictable contributions
Both are desirable but tend to be difficult to reconcile – especially where promises are backed by financial assets