Personal Pensions with Risk sharing: Affordable, Adequate and Stable Private Pensions in Europe

Theo E Nijman and Lans Bovenberg

No 10538, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: D14 D91 E21 E62 G11 G22 G23 G28 H31 H55 J14 J18 J26 J62 P43 (search for similar items in EconPapers)
Date: 2015-04
New Economics Papers: this item is included in nep-age, nep-ias, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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