The Value and Risk of Defined Contribution Pension Schemes: International Evidence

Authors

  • Edmund Cannon,

    1. Edmund Cannon works at School of Economics, Finance and Management, University of Bristol. Ian Tonks works at School of Management, University of Bath. The authors can be contacted via e-mail: edmund.cannon@bristol.ac.uk and I.Tonks@bath.ac.uk. This work has benefited from comments made at seminars at the Universities of Bristol, Exeter, Swansea, and Verona; EU Research Training Network on Financing Retirement in Europe Conference, Toulouse, 2005; Future of Pension Plan Funding Conference, Financial Markets Group, London School of Economics, 2007; Global Finance Conference, University of West of England, 2008; and Risks in DC pensions conference, University of Exeter, 2010. We are grateful for the suggestions from two anonymous referees.
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  • Ian Tonks

    1. Edmund Cannon works at School of Economics, Finance and Management, University of Bristol. Ian Tonks works at School of Management, University of Bath. The authors can be contacted via e-mail: edmund.cannon@bristol.ac.uk and I.Tonks@bath.ac.uk. This work has benefited from comments made at seminars at the Universities of Bristol, Exeter, Swansea, and Verona; EU Research Training Network on Financing Retirement in Europe Conference, Toulouse, 2005; Future of Pension Plan Funding Conference, Financial Markets Group, London School of Economics, 2007; Global Finance Conference, University of West of England, 2008; and Risks in DC pensions conference, University of Exeter, 2010. We are grateful for the suggestions from two anonymous referees.
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Abstract

We use historical data on investment returns and labor income from 16 countries to quantify the value and risk of defined contribution pension plans, building frequency distributions of pension fund and pension replacement ratios for each country. We show that pension risk is substantial and find that pension fund ratios are lower and less variable than when the correlation between wage growth and investment returns is ignored, typically halving the median pension fund ratio. We also show that an all-equity fund is the dominant investment strategy across all countries, although sometimes a life-cycle strategy insures against downside risk.

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