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In this paper we analyse expected liquidity driven changes in asset allocation of Croatian mandatory and voluntary pension funds based on long-term cash flow projections. For mandatory pension funds, expected long-term cash flow are simulated taking into account the life-cycle scheme, changes in the default fund for undecisive newcomers, expected returns of funds and certain demographic and economic assumptions. Analogously, cash flow simulations of voluntary pension funds are simulated, with an additional scenario of short-term outflows due to the possibility of withdrawing earlier. The growing needfor liquidity ofpension funds is expected to impact their asset allocations through the endeavour for more liquid portfolios even in a baseline scenario. In the case of more severe assumptions of various parameters of the model, the liquidity-driven reallocation is expected to influence long-term returns ofpension funds that experience negative or low net inflows, and subsequently lead to negative liquidity premium.

In this article we analyze the expected risk of pension funds with different risk profiles in the proxy life-cycle model of investments for the 2nd pillar pension scheme in Croatia. The benefits of implementing proxy life-cycle investments, compared to the previous model of mandatory pension funds investments, are clearly visible in the total expected amount of accumulated savings from the risk/return perspective. However, those benefits are partially diminished by the fact that the expected risk of a pension fund with the lowest risk profile is not substantially different from the expected risk of a pension fund with a medium risk profile, due to the lack of diversification. Additionally, we analyze the robustness of the proxy life-cycle model to a sudden and severe market shock, where we determine the presence of risk for those members who choose to switch to a pension fund with a lower risk profile at an unfavorable moment.

This paper studies social security reforms in a model with declining population growth and increasing life expectancy. Based on simulations using data on China, it is found that a switch from a pay-as-you-go (PAYG) system to a notional defined contribution system favors the rich, causes the poor to work more, and may change the capital-effective labor ratio depending on the rate of return to personal accounts. A switch from the PAYG system to a modified PAYG system that saves part of the receipts, with the interest rate greater than the growth rate, increases labor supply and decreases the capital-effective labor ratio in period one; decreases labor supply and increases the capital-effective labor ratio after period one; and hurts the poor old more than the rich old while benefitting the poor in future generations more than the rich. If the interest rate is less than the growth rate, the accumulated funds are insufficient to balance the social security budget.

Since the mid 1990s some European countries (including Italy) implemented a Notional Defined Contribution (NDC) pension system. Such a system is based on pay-as-you-go funding, while the pension amount is a function of the individual lifelong contribution. Despite many appealing features, the NDC system presents some drawbacks: first, it is vulnerable to demographic and economic shocks compromising the financial sustainability; second, it could fail to guarantee adequate pension benefits to pensioners. In order to reduce the first limit, automatic balance mechanisms (ABMs) have been proposed in literature and also implemented in Sweden, while solutions that combine financial sustainability and social adequacy have been applied only in a pay-as-you-go point system. The aim of this paper is to insert into the Italian NDC architecture ABMs that preserve social adequacy under financial sustainability constraints. Godinez-Olivares et al. (Insur Math Econ 69:117–126, 2016) built ABMs for a Defined Benefit pension system using nonlinear optimization techniques to calculate the optimal paths of the control variables representing the main drivers of the system: contribution rate, retirement age and indexation of pensions. Following this line of research, we have developed a nonlinear optimization model for the Italian NDC system based on three control variables: pensions indexation, notional rate and contribution rate. The objective function considers both social adequacy and contribution rate sustainability, under liquidity and sustainability constraints. In the numerical application we apply the model to the Italian pension system and test the sensitivity of the results to different economic scenarios and objective function parameters.

The aim of this work is to provide the logical sustainability model for defined contribution pension systems (see [1], [2]) in the discrete framework under stochastic financial rate of the pension system fund and stochastic productivity of the active participants. In addition, the model is developed in the assumption of variable mortality tables. Under these assumptions, the evolution equations of the fundamental state variables, the pension liability and the fund, are provided. In this very general discrete framework, the necessary and sufficient condition of the pension system sustainability, and all the other basic results of the logical sustainability theory, are proved. In addition, in this work new results on the efficiency of the rule for the stabilization over time of the level of the unfunded pension liability with respect to wages, level that is defined as indicator, are also proved.

The crisis of pension systems based on pay-as-you-go (PAYG) financing has led to the introduction in some countries, including Italy, of so-called notional defined contribution (NDC) pension accounts. These systems mimic the functioning of defined contribution systems in benefit calculations while remaining based on PAYG financing. Despite many appealing features, NDC accounts cannot automatically guarantee a system’s financial sustainability in the presence of demographic or economic fluctuations. The literature proposes automatic balance mechanisms (ABMs) of the notional rate applied to notional accounts and an indexation rate applied to pensions. ABMs may be based on two indicators: the liquidity ratio or the solvency ratio. Such ABMs may strengthen a system’s financial sustainability but may produce significant fluctuations in the adjusted notional rate, thereby undermining the social adequacy of the system. In this work, we introduce a mixed ABM based on both the liquidity ratio and solvency ratio and identify the optimal combination that guarantees financial sustainability of the system and, at the same time, maximizes the return paid to the participants at fixed levels of confidence. The numerical results show the advantages of a mixed mechanism over those based on a single indicator. Indeed, although the results depend on the system’s initial conditions and the different ABM configurations tested (16 in total), some common patterns emerge across the solutions. A solvency ratio-based ABM maximizes social utility, while a liquidity ratio-based one ensures financial stability. Although not optimal for either criterion, the ABM that mixes the liquidity ratio and solvency ratio in proportions ranging from 60–40% to 50–50% emerges from our numerical simulations as the best compromise to achieve these two objectives jointly.

This paper deals with the problem of the optimal rate of return to be paid by a defined contribution pension system to its participants’ savings, namely the rate that achieves the goal of the most favorable returns on their contributions jointly with the sustainability of the pension system. We consider defined contribution pension systems provided with a funded component, and for their study we use the “theory of the logical sustainability of pension systems” already developed in several previous works. In this paper, we focus on pension systems in a demographically stable state, whereas the productivity of the active participants and the financial rate of return on the pension system’s fund, rates that constitute the “ingredients” of the optimal rate of return on contributions, are modeled by two stochastic processes. We show that the decisional rule defining the optimal rate of return on contributions is optimal in the sense that it is effective in terms of sustainability, and also efficient in the sense that if the system pays to its participants’ contributions a rate of return that is either higher or lower than the one provided by the rule, then the pension system becomes unsustainable or overcapitalized, respectively.

Pension reform is a key policy challenge in Russia. This paper examines how pension spending could increase in Russia in the absence of reforms, quantifies the impact of some recent proposals, and suggests some alternatives that would ensure public pension benefits - relative to wages - not fall from current levels while containing spending.

The Chinese pension system is highly fragmented and decentralized, with governance standards, pension fund management practices, their regulation and supervision varying considerably both across the funded components of the Chinese pension system and across provinces. This paper describes the key components of the system, highlights the progress made to date and identifies remaining weaknesses, in regard to information disclosure, the governance framework and pension fund management standards.

Empirical analysis of two decades of pioneering pension and social security reform in Latin America and the Caribbean shows that much has been achieved, but that critical challenges remain. In tackling this unfinished agenda, a great deal can be learned from the reform experience of countries in the region. Keeping the Promise, produced by the chief economist's office in the Latin America and Caribbean Region at the World Bank, evaluates policy reforms in 12 countries, points to successes and shortcomings, and proposes priorities and options for future reform. \"Keeping the Promise provides a timely assessment of two decades of pension reform experience-with a wealth of new data, and empirical evaluation of reformed social security systems. Many economists and policymakers will not be persuaded by some of the main conclusions and recommendations-such as the supposed failure to increase coverage, and the call for strengthening a pay-as-you-go defined-benefit scheme for poverty prevention-but they will welcome the book's critical appraisal. This is required reading for pension specialists and policymakers in Latin America and beyond.\" -Klaus Schmidt-Hebbel, Chief of Economic Research, Central Bank of Chile \"A heavyweight analysis of the Latin American pension revolution which raises important questions about the optimal scale of compulsory saving when redesigning pension systems.\" -Paul Wallace, The Economist.