How should a points pension system be managed?

IPP Policy Brief n°43

June 2019

Authors : Antoine Bozio, Simon Rabaté, Audrey Rain, Maxime Tô

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Summary:

A points system, operating at defined yield, makes it possible to rethink how pension systems are managed. Instead of having to make repeated ad hoc changes to the parameters of the system, it is possible to define change rules that other guarantees to future pensioners, as regards not only their entitlements but also the long-term sustainability of the system. In this brief, and based on simulations of a variety of shocks to the pension system, we study what management rules deserve to be chosen. Two rules absolutely must be selected: firstly the growth in the value of the pension point should match the growth in salaries; and secondly converting the points into pension should take into account the life expectancy of each generation (cohort). A third rule that is important for the long term, is the relationship between the rules for index-linking claimed pensions and the amounts of the pensions when they start being claimed. This rule should serve as a guide to managers so that they can steer the system towards an equilibrium that is not based on too low an index-linking of the pensions. Such management implies high institutional autonomy for the system, whereby the managers need to be accountable for the finnancial equilibrium and for the risks to pension revaluation.

Cette note est liée au rapport IPP n°23 “Quelles règles de pilotage pour un système de retraite à rendement défini ?”

Key points:

A defined-yield points system offers guarantees for pension entitlements through a strict rule for revaluating the value of the point based on growth in salaries.
Converting the points into pension, at the time the pension starts being claimed, should explicitly take into account how life expectancy changes for each cohort.
Systems that incorporate these rules are better able to absorb economic and demographic shocks, and thus to guarantee that they are financially sustainable.
The index-linking of the pensions depends directly on the degree of advance on pension already granted on claiming, and on the rate of growth of the wage bill. It is up to the managers to choose the degree of advance on pension in order to guarantee a sufficient revaluation of claimed pensions.
Pension management cannot be based entirely on index-linking rules. In addition to the need for having a reserve fund for smoothing out temporary shocks, the managers need to cope with the uncertainties regarding long-term growth and population growth rate.

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