In the uk reforms people were encouraged to purchase

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In the U.K. reforms, people were encouraged to purchase personal pension funds. Higher income workers would not be required to purchase them and people could get out of their employer sponsored pension funds and invest their money in the personal pension funds. They differ because the Swiss had the AHV invest funds in the equity market (regulated) while personal pension funds gave much more freedom to people. UK: allowed people to opt out of full social security but must have basic social security. with the rest if they don’t want full they can invest their money in approved personal pension plans. Difference- the UK basically forgoes many advantages of economies of scale (smaller pool means financial, operational econ of scale), higher transactional costs 10/7/2019 5
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iv. What are the advantages and disadvantages of the two reforms? Swiss: o Adv. = AHV will earn money to help struggling social security programs, potentially higher return, increased diversification o Disadv. = risk bc equity markets can be volatile, investment risk U.K. o Adv. = freedom to invest your own money o Disadv. = people don’t know how to invest money well, companies stopped matching contributions, high transaction fees C. Read “Passing the Buck: In New Pension Plans Companies Are Putting the Onus on Workers” (Item 10.3) and “Mutual Funds Are Trouncing Rivals In Battle for Billions of Pension Dollars.” (Item 10.4) i. Is the shift from defined benefit to employee-directed defined contributions plans desirable from the point of view of participants? What are the pros and cons? Pros: o can choose where they want their money to go and grow their retirement fund. before, they were paid a fixed and predetermined amount. more portable (DCP is by nature more portable). o freedom to choose own investments (will cost money to do research and make investments, and you face investment risk). Cons: o risk is transferred to participants. no stability of fixed payment, bad investment decision can wipe out savings. o You face higher risks (if you suck at investing), cost of making investments is transferred to employee (transaction costs); most people don’t invest in high-return investments (e.g. stocks); some people stopped making contributions to their retirement funds so that they could use income to pay bills (@ young people) with DBP u are protected from the risk of under saving and inflation. o costs of making investments transferred from employers to employees. cost of defined contribution plans also passed on to employees ii. What kind of business opportunities does this create? Participants can grow their retirement funds instead of having a fixed payment amount that is set. o Creates large business opportunities for investment management companies who handle the retirement portfolios of the employees.
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