1887

OECD Working Papers on Insurance and Private Pensions

Selected studies on insurance and private pensions policy prepared for use within the OECD and addressing such policy issues as risk management, governance, types of investments, and benefit protection. This working papers series has been discontinued; it is superseded by ‘OECD Working Papers on Finance, Insurance and Private Pensions’ available via: http://dx.doi.org/10.1787/20797117.

English

Investment Regulations and Defined Contribution Pensions

This paper assesses the impact of different quantitative approaches to regulate investment risk on the retirement income stemming from defined contribution (DC) pension plans. It looks at how such regulations affect the spectrum of investment policies available and, through this channel, how they affect the retirement income that an individual may expect from a DC pension plan. The analysis shows that there is a trade-off between potential retirement income and protection from bad outcomes. Reducing the downside risk on retirement income from DC pension plans requires moving into relatively conservative investment policies where the share of assets allocated to bonds may be quite large. However, this comes at the cost of renouncing potentially higher replacement rates that are attainable but at a higher risk of unfavourable retirement income outcomes. Less risk adverse regulators and supervisors would aim at lower probability requirements as regard the downside risk, which will increase the range of investment policies available and thus the share of riskier assets.

English

Keywords: retirement income, defined contribution plans, regulation, replacement ratios, risk-management, investment
JEL: G11: Financial Economics / General Financial Markets / Portfolio Choice; Investment Decisions; D14: Microeconomics / Household Behavior and Family Economics / Household Saving; Personal Finance; J14: Labor and Demographic Economics / Demographic Economics / Economics of the Elderly; Economics of the Handicapped; Non-labor Market Discrimination; J26: Labor and Demographic Economics / Demand and Supply of Labor / Retirement; Retirement Policies; G38: Financial Economics / Corporate Finance and Governance / Corporate Finance and Governance: Government Policy and Regulation; D91: Microeconomics / Micro-Based Behavioral Economics / Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making; E21: Macroeconomics and Monetary Economics / Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy / Macroeconomics: Consumption; Saving; Wealth
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