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The choice of private pension plans under uncertainty

Author

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  • Agar Brugiavini

    (Institute for Fiscal Studies and Ca' Foscari University of Venice)

  • Richard Disney

    (Institute for Fiscal Studies and University of Sussex)

Abstract

Individuals in the UK now face an effective choice between joining different types of pension plan. We model this choice in a life cycle utility- maximising framework, for risk averse individuals. It is assumed that no pension plan can guarantee every individual a fair annuity at the risk-free rate of interest. By opting for a 'defined contribution' (money purchase) pension, the individual is assumed to incur investment risk (uncertainty of outcome in the capital market). By opting for a final salary based 'defined benefit' plan, the individual incurs a risk of reduced pension rights associated with job turnover. Assuming that the expected return to the two plans is identical, and equal to the risk free rate of interest, utilities are evaluated consequent upon choice of pension plan, including mixed strategies, in a multiperiod framework. The sensitivity of utility, and choice of pension arrangement, to variations in the individual risk of job severance, to capital market risk, and to the nature of risk aversion, are examined.

Suggested Citation

  • Agar Brugiavini & Richard Disney, 1995. "The choice of private pension plans under uncertainty," IFS Working Papers W95/05, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:ifsewp:95/05
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    Cited by:

    1. Robert Jahoda & Jiøí Špalek, 2009. "Pension Reform through Voluntary Opt-Out: The Czech Case," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(4), pages 309-333, Oktober.
    2. Richard Disney & Carl Emmerson & Sarah Smith, 2004. "Pension Reform and Economic Performance in Britain in the 1980s and 1990s," NBER Chapters, in: Seeking a Premier Economy: The Economic Effects of British Economic Reforms, 1980–2000, pages 233-274, National Bureau of Economic Research, Inc.
    3. Richard Disney, 1995. "Occupational pension schemes: prospects and reforms in the UK," Fiscal Studies, Institute for Fiscal Studies, vol. 16(3), pages 19-39, September.
    4. James Banks & Carl Emmerson, 2000. "Public and private pension spending: principles, practice and the need for reform," Fiscal Studies, Institute for Fiscal Studies, vol. 21(1), pages 1-63, March.

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