Funded defined-benefit pensions add to welfare on account of providing intergenerational risk sharing, but lower it on account of inducing labour supply distortions. We show that a properly designed funded defined-benefit pension scheme involves a welfare improvement even if contributions are distortionary and even if individuals face potentially correlated wage and equity risks. Numerical calculations indicate that diversification gains from risk sharing are large compared to the losses related to labour supply distortions. This result withstands a number of extensions, like the introduction of a short-sale constraint for individuals or the inclusion of a labour income tax.

This paper stems from the observation that there are two world-wide trends, pension reform and population ageing, and asks whether the two may be related. Exploring the cases of pension reform in different countries, we find that, although they are very different, the cases share a common characteristic: they shift risks away from workers towards those who are retired. Furthermore, population ageing, by increasing the weight of the elderly relative to working generations, raises the price of intergenerational risk sharing. Combining these findings, we argue and show formally that pension reform can be seen as a welfare-best response to population ageing. * APG Asset Management

occupational pensions, lifetime redistribution, uniform pricing, G23,

In many countries, collective funded pension schemes with defined benefits (DB) are being replaced by individual schemes with defined contributions. Collective funded DB pensions may indeed reduce social welfare. This will be the case when the schemes feature income-related contributions that distort the labour-leisure decision. However, these schemes also share risks between generations. This adds to welfare if these risks cannot be traded on capital markets. This paper compares the welfare gains from intergenerational risk sharing with the welfare losses that are due to labour market distortions. We adopt a two-period overlapping-generations model for a small open economy with risky returns to equity holdings. We derive analytically that the gains dominate the losses for the case of Cobb-Douglas preferences between labour and leisure. Numerical simulations for the more general CES case confirm these findings which also withstand a number of other model modifications, like the introduction of a short-sale constraint for households and the inclusion of a labour income tax. These results suggest that collective funded schemes with well-organized risk sharing are preferable over individual schemes, even if labour market distortions are taken into account.

Collective pension contracts allow for intergenerational risk sharing with the unborn. They therefore imply a higher level of social welfare than individual accounts. Collective pension contracts also imply a suboptimal allocation of consumption across time periods and states of nature however. Hence, collective pension contracts also reduce social welfare. This paper explores the welfare effects of a number of collective pension contracts, distinguishing between the two welfare effects. We find that collective schemes can be either superior or inferior to individual schemes.