Its all Back to Front: Critical Issues in the Design of Defined Contribution Pension Plans
Session II - Institutional design of the pension system
17.00 - 18.00 Lecture II.3 David Blake (Cass Business School)
A good defined contribution pension plan is one that is one that is designed from back to front as a single, integrated financial product. The design process begins by determining what size pension is required in retirement, and then working backwards from the projected death date of the member to the planned retirement date, it estimates the fund size needed by the retirement date to deliver this pension.
Then working backwards again to the starting date of the plan and taking into account both the length of the investment horizon during the accumulation phase and likely investment returns during that period, the procedure will estimate the required net contribution rate into the plan. An allowance for administration costs and plan provider profit is made to derive gross contributions.
We find little evidence that Personal Pension Plans, the main type of DC plan in the UK, are well-designed and we discuss six critical design failures covering: charges, lapses, investment strategy, investment performance, fund annuitisation and the incentives to those delivering key components of the plan. We suggest a number of ways in which the design can be improved.
Abstracts
- Lecture I.1 - Luis Viceira
- Lecture I.2 - Jon Exley
- Lecture I.3 - Jeremy Gold
- Lecture II.1 - Raimond Maurer
- Lecture II.2 - Matthias Weiss
- Lecture II.3 - David Blake
- Lecture III.1 - Richard Hinz
- Lecture III.2 - Keith Ambachtsheer
- Lecture III.3 - Zvi Bodie
- Lecture III.4 - Lans Bovenberg
- Key note speech - Lucas Papademos
