Publication: Personal Pension Plans and Stock Market Volatility
Loading...
Files in English
261 downloads
Published
2000-10
ISSN
Date
2014-09-04
Author(s)
Editor(s)
Abstract
One of the strongest objections to personal pension plans is that they transfer investment risk to individual workers, who are then exposed to the vagaries of equity and bond markets. Using historical United States data, the authors investigate the impact of the volatility of investment returns on replacement rates in the context of personal pension plans. They find large fluctuations in replacement rates across different cohorts of workers, if undiversified portfolios are used. They then explore a number of simple financial strategies for coping with this problem, including: a) portfolio diversification; b) a late, gradual shift to bonds; c) a gradual purchase of nominal or real annuities; d) a purchase of variable annuities. The first three strategies lower the volatility of replacement rates, but at significant cost in terms of lower replacement rates. The purchase of variable annuities reduces the dispersion of replacement rates across generations without lowering their level - because of the persistence of the equity premium and the fact that the volatility of equity returns is lower, the longer the holding period. Sophisticated financial engineering promises more efficient solutions to this problem, but it may not be feasible to apply it in developing countries (or in developing financial markets). Neither authors' approach nor the more sophisticated financial engineering solutions would be able to deal effectively with persistent deviations of investment returns from long trends. But the authors' findings suggest that overconcern about the impact on replacement rates of short-term volatility in stock markets may not be warranted.
Link to Data Set
Citation
“Alier, Max; Vittas, Dimitri. 2000. Personal Pension Plans and Stock Market Volatility. Policy Research Working Paper;No. 2463. © http://hdl.handle.net/10986/19970 License: CC BY 3.0 IGO.”
Digital Object Identifier
Associated URLs
Associated content
Other publications in this report series
Publication Climate and Social Sustainability in Fragility, Conflict, and Violence Contexts(Washington, DC: World Bank, 2026-01-07)Climate change is widely recognized as a driver of violent conflict, but its broader social effects remain less understood. Ignoring these dimensions risks a vicious cycle where climate policies might undermine socially just adaptation. Evidence is still limited on how climate shocks influence political participation, trust, or migration. This paper helps fill that gap by examining links between climate change, conflict, and social sustainability, with a focus on inclusion, resilience, cohesion, and legitimacy. Using secondary data from 2019–24, the study applies simple correlation-based methods to test three hypotheses on the nature, severity, and composition of these associations. The analysis combines multiple climate impact measures, new conflict classifications, recent social sustainability frameworks, and controls for population and geography. The results reveal strong correlations—not causation—between climate events and contexts of fragility, conflict, and violence. Climate impacts are most pronounced in both national and subnational conflict settings. The study also finds robust links between fragility, conflict, and violence and low levels of social sustainability, reflecting its role as both a driver and consequence of conflict. Some dimensions—such as violent events and insecurity—appear weaker in areas most affected by climate shocks. Two of the hypotheses are supported, and one remains inconclusive.Publication The Macroeconomic Implications of Climate Change Impacts and Adaptation Options(Washington, DC: World Bank, 2025-05-29)Estimating the macroeconomic implications of climate change impacts and adaptation options is a topic of intense research. This paper presents a framework in the World Bank's macrostructural model to assess climate-related damages. This approach has been used in many Country Climate and Development Reports, a World Bank diagnostic that identifies priorities to ensure continued development in spite of climate change and climate policy objectives. The methodology captures a set of impact channels through which climate change affects the economy by (1) connecting a set of biophysical models to the macroeconomic model and (2) exploring a set of development and climate scenarios. The paper summarizes the results for five countries, highlighting the sources and magnitudes of their vulnerability --- with estimated gross domestic product losses in 2050 exceeding 10 percent of gross domestic product in some countries and scenarios, although only a small set of impact channels is included. The paper also presents estimates of the macroeconomic gains from sector-level adaptation interventions, considering their upfront costs and avoided climate impacts and finding significant net gross domestic product gains from adaptation opportunities identified in the Country Climate and Development Reports. Finally, the paper discusses the limits of current modeling approaches, and their complementarity with empirical approaches based on historical data series. The integrated modeling approach proposed in this paper can inform policymakers as they make proactive decisions on climate change adaptation and resilience.Publication Institutional Capacity for Policy Implementation: An Analytical Framework(Washington, DC: World Bank, 2026-01-07)State capacity is an important prerequisite for policy implementation, yet at the country level it is difficult to measure, assess, and reform. This paper proposes a focus on institutional capacity: the ability of public institutions to implement the specific policy mandates for which they are responsible. Based on a review of existing literature, the paper defines the different dimensions that compose institutional capacity and groups them into two cross-cutting categories: organizational dimensions (personnel, financial resources, information systems, and management practices) and governance dimensions (transparency, independence, and accountability). The paper proposes measures for organizational and governance dimensions using existing data, shows intra-institutional variation of these measures within countries, and discusses how new data could be collected for better measurement of these concepts. Finally, the paper illustrates how the framework can be used to diagnose the sources of common problems related to weak policy implementation.Publication South Africa’s Fragmented Cities: The Unequal Burden of Labor Market Frictions(Washington, DC: World Bank, 2026-01-08)Using high-resolution administrative, census, and satellite data, this paper shows that South African cities are characterized by spatial mismatches between where people live and where jobs are located, relative to 20 global peers. Areas within 5 kilometers of commercial centers have 9,300 fewer residents per square kilometer than expected, which is 60 percent below the global median. Poor, dense neighborhoods are most affected. In Johannesburg, a 10-percentile increase in distance from the nearest business hub corresponds to a 3.7-percentile drop in asset wealth (a proxy of household wellbeing) and 4.9-percentile drop in employment. In Cape Town, the declines are 4.0 and 3.7 percentiles, respectively. Employment is 87 percent lower in the poorest decile than the richest in Johannesburg and 61 percent lower in Cape Town. These findings suggest that South Africa’s spatial organization of people and economic activity constrains agglomeration and reinforces inequality. This methodology provides a scalable and standardized data-driven framework to analyze spatial accessibility and agglomeration frictions in complex, data-constrained urban systems.Publication Investment in Emerging and Developing Economies(Washington, DC: World Bank, 2026-01-07)The world faces a pressing challenge to meet key development objectives amid slowing growth and rising macroeconomic and geopolitical risks. With the number of job seekers rising rapidly, infrastructure shortfalls continuing to be large, and climate costs mounting, the case for a significant investment push has never been stronger. Yet the capacity to respond in many emerging markets and developing economies has eroded. Since the global financial crisis, investment growth has slowed to about half its pace in the 2000s, with both public and private investment weakening. Foreign direct investment inflows—a critical source of capital, technology, and managerial know-how—have also fallen sharply and become increasingly concentrated, leaving low-income countries with only a marginal share. The risks of further retrenchment are significant, as trade tensions, policy uncertainty, and elevated debt levels continue to weigh on investment. Reigniting momentum will require ambitious domestic reforms to strengthen institutions, rebuild macro-fiscal stability, and deepen trade and investment integration—the foundations of a supportive business climate. At the same time, international cooperation is indispensable. A renewed commitment to a predictable system of cross-border trade and investment flows, combined with scaled-up financial support and sustained technical assistance, is essential to help emerging markets and developing economies—especially low-income countries and economies in fragile and conflict situations—bridge financing gaps and implement the domestic reforms needed to restore investment as an engine of growth, jobs, and development.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Annuities and Other Retirement Products : Designing the Payout Phase(World Bank, 2011-02-18)This book examines recent changes in the landscape of retirement products and annuity markets in five countries. All the selected countries (Australia, Chile, Denmark, Sweden, and Switzerland) have mandatory or quasi-mandatory savings schemes. But they also exhibit significant differences in the structure of their pension systems, the relative importance of public pillars, the role and structure of private provision, the level of annuitization, and the structure and focus of their regulatory frameworks. Five studies have been commissioned to examine the state of annuity markets in each of these countries. The findings of these studies are summarized in the last five chapters of this book. The chapters of this book is discusses the various risks faced by pensioners and the risk characteristics of alternative retirement products, and it reviews the risks faced by providers of retirement products and the management and regulatory challenges of dealing with those risks. The chapter then discusses the risks faced by providers and reviews the challenges of various regulatory issues, ranging from the institutional organization of the market for retirement products to the regulation of marketing and pricing policies and the regulation of risk management. The chapter concludes with a brief summary of main points and conclusions.Publication The Payout Phase of Pension Systems : A Comparison of Five Countries(2010-04-01)This paper provides a comparative summary of the payout phase of pension systems in five countries -- Australia, Chile, Denmark, Sweden, and Switzerland. All five countries have large pension systems with mandatory or quasi-mandatory retirement savings schemes. But they exhibit important differences in the structure and role of different pillars, regulation of payout options, level of annuitization, market structure, capital regulations, risk management, and use of risk sharing arrangements. The paper summarizes the experience of these countries and highlights the lessons they offer to other countries.Publication Designing the Payout Phase of Funded Pension Pillars in Central and Eastern European Countries(2010-04-01)Over the past decade or so, most Central and Eastern European countries have reformed their pension systems, significantly downsizing their public pillars and creating private pillars based on capitalization accounts. Early policy attention was focused on the accumulation phase but several countries are now reaching the stage where they need to address the design of the payout phase. This paper reviews the complex policy issues that will confront policymakers in this effort and summarizes recent plans and developments in four countries (Poland, Hungary, Estonia, and Lithuania). The paper concludes by highlighting a number of options that merit detailed consideration.Publication The Decumulation (Payout) Phase of Defined Contribution Pillars : Policy Issues in the Provision of Annuities and Other Benefits(World Bank, Washington, DC, 2000-10)Most countries reforming their pension system, focus more on the accumulation phase, than on the decumulation (pay-out), because the number of beneficiaries is likely to be small initially, especially if older workers are discouraged from joining the new system. Policymakers place a priority on the new accumulation system being administratively efficient, and well regulated. But the decumulation phase must also be well organized, and efficient. The purpose of pension systems is, after all, to pay retirement benefits - old age, survivor, and disability pensions. The authors argue that: 1) Pay-out arrangements are likely to evolve gradually, through trial and error, as problems are discovered and tackled. 2) Adverse selection may not be as great a problem as is sometimes thought. 3) Many other annuity, and insurance market problems have yet to be solved, and policies must be formulated to make these markets work as well. The under-development of voluntary annuity markets is only partly explained by adverse selection, argue the authors. Other factors are also at work: the bequest, and precautionary motives for saving; individuals' myopia and ignorance; mistrust of insurance companies; the "luxury good" nature of annuities; tax policies that favor lump sum withdrawals; and, last but not least, public policies (such as the offer of social security pensions and the encouragement of occupational pension plans) that tend to crowd out individual annuities. The long-term success of pension reform depends on vigorous efforts to develop the insurance industry. Weak and under-developed in most developing countries, the insurance industry should play a central role in providing old age, survivor, and disability benefits. Many policy issues require careful thought, and extensive empirical analysis: Should annuitization be mandatory, and at what level? Should indexed (or "real") annuities be required? Should variable annuities be permitted, or encouraged? Should joint annuities be required? How much "group rating" and "risk classification" should be permitted?Publication A Short Note on the ATP Fund of Denmark(World Bank, Washington, DC, 2008-02)The Danish ATP (Arbejdmarkedets TillaegsPension or Labor Market Supplementary Pension) fund is a public pension fund that was created in 1964 to complement the universal pension benefit that is financed from general tax revenues and is paid to all old-age residents. When it was created, participation in ATP was compulsory on most working people. But over the last decade or so compulsory coverage has been expanded to most recipients of transfer income. Contribution amounts are set in absolute terms, but are low relative to earnings (less than 1 percent of average earnings). ATP has benefited from scale economies and compulsory worker participation and has been able to operate with high efficiency and low costs. Its investment performance has been uneven over the years, reflecting the applied investment policies and rules as well as prevailing financial conditions. In recent years, it has been a leader among Danish pension institutions in adopting innovative investment policies and has enjoyed an enviable record of high investment returns and low operating costs. In addition, it has long offered deferred group annuities with guaranteed benefits and periodic bonuses (with profits policies). However, ATP also suffers from several weaknesses and shortcomings. It has a cumbersome governance structure, rooted in labor market relations and the role of social partners, while its group annuities have been based on rather 'idiosyncratic' risk-sharing arrangements. Nevertheless, it took the lead in using long-dated interest-rate swaps in euro markets and recently created a department that specializes in hedging its pension liabilities. And it is in the process of adopting a new plan for guaranteed benefits that aims to enhance the management of both investment and longevity risks.
Users also downloaded
Showing related downloaded files
Publication World Bank Group Assistance to Low-Income Fragile and Conflict-Affected States : An Independent Evaluation(World Bank, Washington, DC, 2014-01)Fragile and conflict-affected states (FCS) have become an important focus of World Bank Group assistance in recent years as recognition of the linkages between fragility, conflict, violence, and poverty has grown. Addressing issues of recurring conflict and political violence and helping build legitimate and accountable state institutions are central to the Bank Group's poverty reduction mission. This evaluation assesses the relevance and effectiveness of World Bank Group country strategies and assistance programs to FCS. The operationalization of the World Development Report 2011: Conflict, Security, and Development (2011 WDR) is also assessed, to see how the framework has been reflected in subsequent analytical work, country assistance strategies, and the assistance programs. The evaluation framework was derived from the concepts and priorities articulated in recent WDRs, policy papers, and progress reports issued by Bank Group management, to draw lessons from FCS. The framework is organized around the three major themes emerging from the 2011 WDR: building state capacity, building capacity of citizens, and promoting inclusive growth and jobs. The evaluation focuses on International Development Association (IDA)-only countries, which are deemed to have certain characteristics such as very low average income and no access to private finance, making them eligible for special finance tools and programs. As the benchmark for measuring results, Bank Group performance is evaluated in 33 fragile and conflict-affected states against that of 31 IDA-only countries that have never been on the FCS list. Six new country case studies; analyses of Bank Group portfolios; human resources and budget data; secondary analysis of IEG evaluations; background studies including those on aid flows, gender, private sector development, and jobs; and surveys of Bank Group staffs and stakeholders are also included in the evaluation.Publication Trade Integration as a Way Forward for the Arab World : A Regional Agenda(2011-02-01)The current political turmoil for more open and participative societies in many Arab countries coupled with the emergence of new growth poles around the world could create the conditions for a big push toward greater regional and global trade integration of the Arab world. Further integrating Arab countries among themselves and opening up the region to the rest of the world are two complementary avenues to improve market access, promote behind-the-border regulatory reforms, facilitate cooperation on regional public goods, foster the emergence of an "Arab factory" through regional supply chains and productions networks, and eventually create the conditions for more and better paid jobs for the growing Arab workforce. A more ambitious trade agenda in the context of the Pan-Arab Free Trade Area would be a good place to start. Although difficult and challenging, and requiring a good dosage of flexibility and variable geometry, such an agenda would consist of (1) completing the free movement of goods within the Pan-Arab Free Trade Area, notably through the elimination of unnecessary non-tariff barriers; (2) implementing a regional initiative to liberalize services trade, including identifying a number of pilot service sectors for early regional liberalization; and (3) strengthening the rules and discipline applicable to regional trade and other policies of common interest.Publication FY 2022 Cameroon Country Opinion Survey Report(Washington, DC: World Bank, 2022-06)The Country Opinion Survey in Cameroon assists the World Bank Group (WBG) in gaining a better understanding of how stakeholders in Cameroon perceive the WBG. It provides the WBG with systematic feedback from national and local governments, multilateral and bilateral agencies, media, academia, the private sector, and civil society in Cameroon on: (1) their views regarding the general environment in Cameroon; (2) their overall attitudes toward the WBG in Cameroon; (3) overall impressions of the WBG’s effectiveness and results, knowledge work and activities, and communication and information sharing in Cameroon; and (4) their perceptions of the WBG’s future role in Cameroon.Publication Regional Poverty and Inequality Update: Latin America and the Caribbean, October 2025(Washington, DC: World Bank, 2025-10-23)This brief summarizes recent facts related to poverty and inequality in Latin America and the Caribbean (LAC) using the latest wave of harmonized household surveys from the Socio-Economic Database for LAC (SEDLAC). This brief was produced by the Poverty Global Practice in the LAC Region of the World Bank.Publication Digital Africa(Washington, DC: World Bank, 2023-03-13)All African countries need better and more jobs for their growing populations. "Digital Africa: Technological Transformation for Jobs" shows that broader use of productivity-enhancing, digital technologies by enterprises and households is imperative to generate such jobs, including for lower-skilled people. At the same time, it can support not only countries’ short-term objective of postpandemic economic recovery but also their vision of economic transformation with more inclusive growth. These outcomes are not automatic, however. Mobile internet availability has increased throughout the continent in recent years, but Africa’s uptake gap is the highest in the world. Areas with at least 3G mobile internet service now cover 84 percent of Africa’s population, but only 22 percent uses such services. And the average African business lags in the use of smartphones and computers as well as more sophisticated digital technologies that catalyze further productivity gains. Two issues explain the usage gap: affordability of these new technologies and willingness to use them. For the 40 percent of Africans below the extreme poverty line, mobile data plans alone would cost one-third of their incomes—in addition to the price of access devices, apps, and electricity. Data plans for small- and medium-size businesses are also more expensive than in other regions. Moreover, shortcomings in the quality of internet services—and in the supply of attractive, skills-appropriate apps that promote entrepreneurship and raise earnings—dampen people’s willingness to use them. For those countries already using these technologies, the development payoffs are significant. New empirical studies for this report add to the rapidly growing evidence that mobile internet availability directly raises enterprise productivity, increases jobs, and reduces poverty throughout Africa. To realize these and other benefits more widely, Africa’s countries must implement complementary and mutually reinforcing policies to strengthen both consumers’ ability to pay and willingness to use digital technologies. These interventions must prioritize productive use to generate large numbers of inclusive jobs in a region poised to benefit from a massive, youthful workforce—one projected to become the world’s largest by the end of this century.