Discussion Paper

No. 2012-58 | November 07, 2012
Notional Defined Contribution Pension Schemes and Income Patterns


During the 1990s, some important European countries such as Italy and Sweden radically transformed their public pension systems by adopting defined-contribution rules while retaining a pay‐as‐you‐go financial architecture. The paper inquires into the theoretical properties of such "notional defined contribution" pension schemes in order to identify the determinants of the replacement rates awarded to individuals with different income patterns. Three typical career patterns are taken into consideration, according to whether the individual’s wage growth is equal to, higher than, or lower than average wage growth. The impact of, and the possible remedies to, a possible discontinuity in replacement rates is assessed by means of a sensitivity analysis of replacement rates with respect to career length (for a given retirement age), the retirement age, and the rate of return credited to individual accounts.

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Cite As

Sergio Nisticò and Mirko Bevilacqua (2012). Notional Defined Contribution Pension Schemes and Income Patterns. Economics Discussion Papers, No 2012-58, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2012-58

Comments and Questions

Anonymous - More references
November 08, 2012 - 18:17

The paper is very interesting and the topic dramatically actual. The English-style is appropriate. The readability is good. Moreover, the applied methodology sounds correct. What I only suggest the Authors is to widen the survey of literature within the initial sections, giving more emphasis to the international and historical comparisons. ...[more]

... A table with previous results of empirical researches should help. Finally, suggestions for future research might be inserted after Conclusions (p. 19).

Sergio Nisticò - Reply
February 04, 2013 - 10:48

We searched for relevant literature on the subject, but we didn’t find any pertinent contribution, either theoretical or empirical. Let us add, incidentally, that it was precisely this gap in the (rather recent) scientific literature on pay-as-you-go defined contribution pension schemes that prompted us to write the paper. On ...[more]

... the other hand, we will reshape our concluding section so to add possible developments of our results.

Anonymous - Referee Report
December 10, 2012 - 12:25

see attached file

Sergio Nisticò - Reply
February 04, 2013 - 11:01

see attached file

Carlos Vidal-Melia, University of Valencia - reader report
December 20, 2012 - 10:02

see attached file

Sergio Nisticò - Reply
February 04, 2013 - 10:51

Let us thank, first of all, Carlos Vidal-Melia for his extensive and wide-ranging comments that indicate possible, interesting expansions of our work. Though taking into account all of Vidal’s suggestions would be incompatible with the narrow limits of one single paper, some of them provide useful guidelines to improve the ...[more]

... quality of our work. In particular, we will clarify:

• the distinction between ‘funded’ and ‘notional’ defined-contribution (DC) pension schemes for what concerns the sustainable rate of return, while emphasizing that our results can be extended to any DC scheme regardless of its degree of funding;
• the reasons of our choice to refer to the replacement rate as the ratio between the first pension and the last income;
• that our simulations do not take into account the possible, positive, impact on pension benefits of the ‘survivor dividend’;
• that assuming a different, possibly lower than 30%, contribution rate would ‘reduce the absolute magnitude’ but not alter the results of our work, aimed to emphasize the relative impact of different career profiles on the individual replacement rates;
• the role of Figure 1 relative to the rest of the argument;
• the main implications of our work, by reshaping our concluding section.

Anonymous - reader report
December 20, 2012 - 10:11

see attached file

Sergio Nisticò - Reply
February 04, 2013 - 10:57

We have highly appreciated the well focused synthesis of our paper provided by this reader. Moreover, the specific suggestions to clarify the aim of our paper in the introduction, to be more explicit about the trade off between the replacement rate and the sustainable yearly adjustment of pensions and, finally, ...[more]

... to mention the strong incentive to ‘freely’ postpone retirement age provided by the NDC scheme are all appropriate. We will take into account these suggestions in preparing a new version of our paper.

Heikki Oksanen - Reader comment
January 04, 2013 - 10:58

see attached file

Sergio Nisticò - Reply
February 04, 2013 - 10:52

In contrast with the referee’s suggestion to shorten the second part of our paper and to focus on the first part, which the referee considers innovative with respect to the existing literature, Heikki Oksanen considers the argument contained in the first part of our paper rather trivial and redundant, since ...[more]

... it merely stems from the arithmetic of NDC schemes. On the other hand, he proposes to expand the content of section 3.2 and to add a reference to the second volume of recently published World Bank collection of essays.

We don’t think that highlighting the relationship between career profiles and replacement rates stemming from the arithmetic of NDC is a trivial exercise (if only for the fact that in the political debate on NDC this clear-cut message is regularly neglected). However, we agree that our papers would benefit from a greater emphasis on the problems raised by short and discontinuous careers and we will revise our paper accordingly.

Edward Palmer - Referee Report
February 18, 2013 - 08:50

see attached file