Subjective Economic Risk to Beneficiaries in Notional Defined Contribution Accounts


  • The authors would like to thank Celi Aragón of the University of Valencia for her help in finding data, and María del Carmen Boada Penas, Pierre Devolder, Peter Hall, Ana Lejárraga-García, Julio Lucia-López, and Salvador Valdés-Prieto for their useful suggestions and comments. The comments and suggestions made by the journal's anonymous referees were especially helpful. A preliminary version of this article was presented at the XI Foro de Finanzas in Alicante, Spain. A previous version was published by FUNCAS (Fundación de Cajas de Ahorro Confederadas). Financial support from FUNCAS is gratefully acknowledged. Any errors are due entirely to the authors.


This article aims to quantify the aggregate subjective economic risk to which beneficiaries would be exposed if a retirement pension system based on notional account philosophy were introduced. We use scenario generation techniques to make projections of the factors that determine the real expected internal rate of return (IRR) and the expected replacement rate (RR) for the beneficiary according to six retirement formulae based on the most widely accepted rates or indices. We then apply the model to the case of Spain. Our projections are based on Herce and Alonso's macroeconomic scenario 2000–2050 (2000) and include information about the past performance of the indices and the time period the forecast is to cover. The results of the IRR calculation—average value, standard deviation, and value-at-risk (VaR)—are analyzed both in objective terms and for different degrees of participants' risk aversion.