Demystifying Pension Design: Clearer Principles Foster Better Practices

Abstract

Discussions of pension system design are often difficult to follow, especially when tradeoffs between various system design features are obscured by complicated technical arguments. This article sets out to demystify these discussions by presenting nine guiding principles which ideally shape the key features of any pension system. These principles must cover three design dimensions: human behavior, system stability, and how risks are borne in the system. The article concludes by showing how the application of these principles to the pension systems of the United Kingdom, Sweden, and the Netherlands can clarify the pension design challenges these countries are currently facing, and how implicit design tradeoffs can be made explicit.

Keywords: Behavioral Economics, Pension Design, Pension Fund, Risk Management, Risk Sharing