Personal pensions with risk sharing. Affordable, adequate and stable private pensions in Europe
Private pension provision faces the challenging task of providing stable income streams during retirement. The challenge has increased markedly in the last decades due to volatile financial markets, falling interest rates and the withdrawal of employers and external insurers as risk bearers of systematic financial and longevity risks. Partly because of these developments, policyholders desire pensions tailored to their individual needs. This paper proposes a new type
of pension: the Personal Pension with Risk sharing (PPR). By unbundling and valuing the investment, (dis)saving, insurance and risk‐sharing functions of pensions, PPRs allow risk management and (dis)saving to be customized to the specific features of heterogeneous
individuals. Moreover, unlike variable annuities, PPRs allow investment risks to be combined with longevity insurance without giving rise to high year‐on‐year volatility in consumption
streams or opaque and rigid valuation and smoothing rules. The unbundling of functions in the PPR also deepens the internal markets for financial and insurance products while at the same time accommodating the diverse traditions of countries in terms of occupational pension provision. Finally, the PPR reconciles financial, fiscal and macroeconomic stability with growth
by increasing the supply of long‐term risk‐bearing and illiquid capital, complementing public retirement provision, reducing the interest‐rate sensitivity of pensions and smoothing shocks.