Implications of Behavioural Economics for Mandatory Individual Account Pension Systems

Abstract

Implications of behavioural economics for mandatory individual account pension systemsIn individual account pension systems, members bear the risks and consequences of their investment decisions. If participants behave as predicted by economic theory, such responsibility would be welfareenhancing as members would invest and hold a portfolio of financial assets with a risk-return combination consistent with their investment horizon, degree of risk aversion and the portfolio of other assets they hold, including their human capital and, where relevant, their home. Behavioural economists and empirical researches have shown that in reality members are not particularly good at handling their retirement savings, either because they lack the necessary cognitive ability to solve the optimization problem, because they have insufficient will power to execute it, or even sometimes because they are overconfident. This paper describes the extent to which plan members make active investment decisions in these systems and assesses the policy solutions that have been put forward to facilitate choice. The paper offers a comparative analysis of ten countries that have implemented investment choice in the accumulation stage of their individual account pension system.

Choice of Retirement Funds in Chile: Are Chilean Women More Risk Averse than Men?

“…Older people, particularly those in the default plan, are therefore more limited in their ability to invest in risky funds. The percentage of people in default plans seems to have dropped substantially from about 86 % in 2002 (Tapia and Yermo 2007) to around 35 % in 2009 (Kristjanpoller andOlson 2014).…”

“…Latin American countries, including Chile, offer a limited number of portfolios and require the default investments to have a life-cycle strategy (Tapia and Yermo 2007). As of April 2005, the United Kingdom requires default funds to use some form of life-cycle fund (Byrne et al 2007).…”

“…Mitchell and Utkus (2012) reported that in 2010 70 % of DC plans offered target-date funds and 36 % of all participants held positions in these funds. In Chile, when the choice of five funds was first offered in 2002, only 14 % made active choices but the percentage has increased overtime (Kristjanpoller and Olson 2014;Tapia and Yermo 2007). Participants in some places such as those in Sweden and Latin America are primarily passive investors while investors in Central and Eastern Europe and Hong Kong are far more active (Tapia and Yermo 2007).…”

Choice Overload and Height Ranking of Menus in Partially-Ordered Sets

“…The key aspects of pension plan design are the range of investment options, the design of the default strategy option and the extent of freedom of choice. A review of the international experience shows different approaches to these regulatory issues" [27].…”

Is Social Security Secure with NDC?

“…Funds are privatly managed, but they are regulated by a Premium Pension Authority (PPM), which collects the contributions and negotiates the fee with pensions company. In practice the fund manager has just the PPM as client, which keeps account for all individual participants to the fund 5 (see Tapia and Yermo, 2007). The quasi mandatory occupational plans stem from the agreements between employers associations and trade unions.…”