Optimal design and regulation of funded pension schemes

This paper reviews the literature on the optimal design and regulationof funded pension schemes. We first characterize optimal saving andinvestment over an individual’s life cycle. Within a stylized modeling framework, we explore optimal individual saving and investing behavior. Subsequently, various extensions of the model are considered, such as additional financial risk factors, stochastic human capital and more elaborate individual preferences. We then turn to the literature on intergenerational risk sharing, which suggests that a long-lived entity such as a pension fund or the governmentcan yield ex-ante welfare gains by allowing non-overlapping generations to trade risk. The scope for this type of intergenerational risk sharing, however, is limited by the ability to commit generations to the contract. These commitment problems raise concerns with respect to sustainability and intergenerationalfairness. We explore the role of solvency regulations to addressthese concerns about intergenerational fairness and discontinuity risk.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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