Developing Coherent Pension Systems

Abstract

This paper reviews the design of private pensions alongside a notional defined contribution (NDC) – or public – component. A mix of public and private pensions is the bestway to deliver a strong combination of five core outcomes: coverage, adequacy,sustainability, efficiency, and security. Choices for market structure, benefit type,contributions, and investment strategy can be guided by their impact on these outcomes.The clarity of an NDC formula allows the joint distribution of public and private pensions tobe modeled which can be crucial for optimal investment strategies given, for example, thenegative correlation between real per capita gross domestic product growth and equity markets over long periods. NDC payout formulas have broad applications where annuity markets are weak.