Private pensions

Evaluation of minimum return guarantees in defined contribution pension plans

 

Paris, 30 September 2011


The Working Paper “The Role of Guarantees in Defined Contribution Pensions” argues that, while there is a clear need to better protect retirement income from financial market volatility, the costs and benefits of investment return guarantees should be carefully evaluated. Investment return guarantees offer protection from adverse investment performance but can be costly. The report calculates the market price of different guarantees in the form of a charge on member savings or contributions paid into the pension plan, which ultimately reduce the expected level of benefits. The higher the return guaranteed and the shorter the investment horizon, the greater their cost, and hence the less attractive they become for members. The report finds that the cheapest guarantee is a protection of the nominal amount of contributions (a capital guarantee). With a 40 year contribution period, a capital guarantee would cost less than 10 basis points. Such a guarantee can be very attractive for plan members: it protects contributions and can thus foster confidence in retirement savings products, as it makes them at least as attractive as keeping the money “under the mattress”.

 

The OECD is expected to carry out further work in this area, and to consider options to reduce the cost of guarantees and evaluate other mechanisms for risk sharing that could improve the security of retirement benefits.

 

Download the Executive Summary (PDF)

Download the full text of the Working Paper (PDF)

Download the background paper by risklab Assessing the Nature of Investment Guarantees in Defined Contribution Pension Plans (PDF)

 

For further information, journalists are invited to contact Juan Yermo (Tel. + 33 1 45 24 96 62 or +33 646 22 50 12), OECD Financial Affairs Division.

 

See also

 

 

 

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