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Conceptualizing, measuring and financing the legacy costs in an NDC reform

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  • HOLZMANN, ROBERT
  • JOUSTEN, ALAIN

Abstract

The paper provides a framework for the conceptualization, definition and measurement of the legacy costs that needs to be addressed in a reform that transforms an unfunded (or non-financial) defined benefit (NDB) scheme into an equally unfunded notional (or non-financial) defined contribution (NDC) scheme. During a transition from NDB to NDC a financing gap typically arises due to accrued to date liabilities from the old system in excess of the NDC scheme's sustainable flow of benefits. This gap – or legacy cost – needs to be estimated and best explicitly financed. We illustrate different techniques to gauge the scope of the cost. The paper applies the proposed approach to a hypothetical NDC reform in China.

Suggested Citation

  • Holzmann, Robert & Jousten, Alain, 2012. "Conceptualizing, measuring and financing the legacy costs in an NDC reform," Journal of Pension Economics and Finance, Cambridge University Press, vol. 11(4), pages 606-630, October.
    • Handle: RePEc:cup:jpenef:v:11:y:2012:i:04:p:606-630_00
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    Cited by:

    1. Alonso-García, J. & Devolder, P., 2016. "Optimal mix between pay-as-you-go and funding for DC pension schemes in an overlapping generations model," Insurance: Mathematics and Economics, Elsevier, vol. 70(C), pages 224-236.

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