The determinants of the money’s worth of participation in collective pension schemes

In many countries, employees have implicit or explicit options to opt-out of collective pension schemes. The contributions to such schemes are often set uniformly, irrespective of age, gender, or education level. We quantify the incentives for individuals that participate in such systems. The indexation quality of pension funds introduces additional incentives to opt-out of schemes with inadequate funding.

We show that young highly educated males have a strong incentive to opt-out of the collective system in case of uniform pricing, since their contribution is high relative to the benefit obtained. This incentive is enforced by the fact that the switching costs for young individuals are relatively low. Moreover, it turns out that the indexation quality of the scheme is a non-negligible determinant of the incentives provided to participants.

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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