Abstract
The redesign of defined benefit pension schemes usually results in a substantial redistribution of wealth between age cohorts of members, pensioners, and the sponsor. This is the first study to quantify the redistributive effects of a rule change by a real world scheme (the Universities Superannuation Scheme, USS) where the sponsor underwrites the pension promise. In October 2011 USS closed its final salary scheme to new members, opened a career average revalued earnings (CARE) section, and moved to ‘cap and share’ contribution rates. We find that the pre-October 2011 scheme was not viable in the long run, while the post-October 2011 scheme is probably viable in the long run, but faces medium term problems. In October 2011 future members of USS lost 65% of their pension wealth (or roughly £100,000 per head), equivalent to a reduction of roughly 11% in their total compensation, while those aged over 57 years lost almost nothing. The riskiness of the pension wealth of future members increased by a third, while the riskiness of the present value of the sponsor’s future contributions reduced by 10%. Finally, the sponsor’s wealth increased by about £32.5 billion, equivalent to a reduction of 26% in their pension costs.
Original language | English |
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Pages (from-to) | 14-28 |
Number of pages | 15 |
Journal | Insurance, Mathematics and Economics |
Volume | 69 |
Issue number | July 2016 |
Early online date | 16 Apr 2016 |
DOIs | |
Publication status | Published - 1 Jul 2016 |
Event | BAFA annual conference - |University of Bath, Bath, UK United Kingdom Duration: 21 Mar 2016 → 23 Mar 2016 |
Bibliographical note
-This study quantifies the redistributive effects of a rule change by a real world scheme.-Future members of USS lost 65% of their pension wealth.
-The sponsor’s costs reduced by 26%, equivalent to £32 billion over 54 years.
-The riskiness of the pension wealth of future members increased by a third.
-The riskiness of the present value of the sponsor’s future contributions reduced by 10%.
Keywords
- Defined benefit
- Pension scheme
- Redistribution
- USS
- Scheme design
- Risk shifting
- Risk management
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
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Emmanouil Platanakis
- Management - Senior Lecturer (Associate Professor)
- Accounting, Finance & Law
Person: Research & Teaching