Roel Mehlkopf

Optimal Design and Regulation of Funded Pension Schemes

This paper reviews the literature on the optimal design and regulation of funded pension schemes. We first characterize optimal saving and investment 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 government can 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 intergenerational fairness. We explore the role of solvency regulations to address these concerns about intergenerational fairness and discontinuity risk.

Intergenerational Risk Sharing Under Endogenous Labor Supply

This paper evaluates the welfare effects from labor-supply distortions in the context of a pre-funded social security scheme. The central feature of the pension fund model is that equity risk manifests itself in the form of implicit taxes and subsidies on the labor earnings of participants. The labor-supply choices of participants are assumed to be elastic with respect to wage-differentials, implying that risk-taking and risk-sharing induces distortions in labor markets. I show that labor-supply effects impede the pension fund from taking advantage of intergenerational risk-sharing. The analysis provides an economic justification for solvency rules that require financial losses to be recouped in a short time-period.

What is the Value of 'Collective' in Collective DC?

This paper measures how financial shocks - equity market, interest rate or inflation shocks - affect different generations of participants in Dutch collective pension schemes. We show that an individualized scheme, by using a life cycle investment strategy, can largely replicate the allocation of traded risks across generations of a collective pension scheme. Collective schemes can shift some financial risk to generations that will participate in the future, whereas individual accounts cannot. In the current institutional setting this shift of traded risk in collective contracts to future generations is limited. Collective pension schemes are able to reallocate non-traded risks among the participants to obtain a more efficient distribution of risk across generations. In schemes with individual accounts, risk sharing is limited to risks traded on financial markets.

The Allocation of Financial Risks During the Life Cycle in Individual and Collective DC Pension Contracts

This paper measures how financial shocks - equity market, interest rate or inflation shocks - affect different generations of participants in pension schemes. We show that an individual scheme, by using a life cycle investment strategy, can largely replicate the allocation of traded risks across generations of a collective pension scheme that gradually adjusts pensions after financial shocks. Collective schemes can shift some financial risk to generations that will participate in the future, whereas individual accounts cannot. In the current institutional setting this shift of traded risk in collective contracts to future generations is limited. Collective pension schemes are able to reallocate non-traded risks among the participants to obtain a more efficient distribution of risk across generations. In schemes with individual accounts, risk sharing is limited to risks traded on financial markets.