Journal of Pension Economics and Finance

Issues and Policy

Collective pension schemes and individual choice  *

JULES H. VAN BINSBERGENa1, DIRK BROEDERSa2, MYRTHE DE JONGa3 and RALPH S. J. KOIJENa4

a1 Stanford GSB, NBER and Tilburg University (e-mail: jvb2@stanford.edu)

a2 De Nederlandsche Bank, Senior Strategy Advisor, Supervision Policy Division (e-mail: dirk.broeders@dnb.nl)

a3 Ministry of Finance, Senior Policy Advisor, Financial and Economic Policy Directorate (e-mail: m.a.c.jong@minfin.nl)

a4 London Business School and Netspar (Tilburg University) (e-mail: rkoijen@london.edu)

Abstract

Collective pension schemes are the dominant form of saving for retirement in the Netherlands. We investigate the introduction of individual choices into a collective pension system without affecting the generally accepted advantages of a collective agreement. Increasing individual choices can be beneficial, as it prevents pension plans from making decisions for the average plan participant that may not be optimal for individual participants. We argue for a system in which individuals choose from a set of low-cost balanced index funds, together with a level of intergenerational guarantees that are exchange-traded. This system maintains the two primary advantages of collective agreements: risk sharing and low implementation costs, while facilitating different risk taking behavior at the individual level. To facilitate individual choices within collective pension schemes, it is important to enhance the transparency associated with intergenerational guarantees to all participants in the scheme, both in terms of their price and quantity. We argue that the current system, in which long-term guarantees are given by the young to the old within a specific fund but not across pension funds, is not transparent and we argue that it can be suboptimal. We propose a system of Pension Guarantee Exchanges (PGEs) that increase transparency and allow pension funds with different age distributions to trade with each other. Knowing the price of such guarantees facilitates the introduction of individual portfolio choices within collective pension schemes.

(Online publication December 16 2013)

Keywords

  • G11;
  • G23

Keywords

  • Defined benefit pension funds;
  • pension guarantee exchanges;
  • individual choice

Footnotes

*  We thank an anonymous referee, Roel Beetsma, Lans Bovenberg, Roderick Molenaar, Theo Nijman, Alwin Oerlemans, Laurens Swinkels, and Coen Teulings for helpful comments and suggestions.