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Industry Papers on Pensions

Paying the High Price of Active Management: A new look at mutual fund fees
Ross M. Miller, World Economics, September 2010
Financial economists have long known that actively managed mutual funds underperform comparable index funds and that investment management fees are a major contributor to this underperformance. This article shows that the impact of mutual fund fees is even greater when one examines what funds actually do with investors’ money. Many actively managed mutual funds have returns that are closely correlated with comparable index funds and yet have annual fees that can be 100 times higher. Because such ‘shadow’ or ‘closet’ index funds provide minimal active management of the assets they hold, the implied annual cost of the active management can dwarf the stated cost. This article provides a simple measure of what investors are actually paying fund managers for that active management that they can compute for themselves data available for free on the Internet. A recent sample of 731 actively managed large-cap US mutual funds has an average active expense ratio of 6.44%, more than 400% greater than their average reported expense ratio of 1.20%. This article also finds that even large, seemingly low-cost, mutual funds common in retirement plans frequently have active expense ratios above 4% a year.
Are Governments Overextended?: Assessing the spectrum of a government’s debts and its exposure to risk
Peter S. Heller , World Economics, December 2004
Have government debt levels reached dangerous levels? Certainly, for some countries, the data would suggest so. However, this paper will argue that for many governments, the amount of explicit debt on their balance sheets seriously understates the magnitude of their future fiscal obligations. This clearly emerges from the assessment of many analysts on the size of the prospective fiscal obligations associated with aging populations. But this point is further reinforced if one examines the range of other fiscal risk exposures of governments. Thus, an examination of a government’s explicit debt should only be the starting point for assessing the sustainability of a government’s fiscal position.
Demographics and Pension Reforms in the Major Central and Eastern European Countries
Dieter Bräuninger, World Economics, March 2003
Today in the Central and Eastern European (CEE) countries there are barely 30 pensioners for every 100 persons of working age. By 2050, the number could rise to almost 80 pensioners. So far Poland has responded the most rigorously to the challenge, establishing a modern three-pillar pension system. The new second pillar forms the core of the bulwark against future demographic strain, with private savings being accumulated in personal accounts kept at private pension funds. Hungary has also established a second pillar of private pension funds, but the necessary restructuring of the state pension scheme is not proceeding fast enough. In the Czech Republic, a three-pillar system thus far exists only on paper.
The Growing US Fiscal Gap
Daniel Shaviro, World Economics, December 2002
The United States has a huge long-term fiscal gap, perhaps with a present value as great as $74 trillion. The US may thus be unable to continue meeting its current spending commitments without eventually enacting huge tax increases. The tax cut enacted in 2001 may have increased the fiscal gap by about $13 trillion, but the main cause of the gap is increasing life expectancy, which raises the cost of Social Security and Medicare. While the fiscal gap can in theory be eliminated at the stroke of a pen by simply changing stated policy, in practice this could lead to serious disruption of people’s expectations. In addition, the fiscal gap may impair future generations’ opportunity to take full advantage of technological advances (such as in treating cancer) that have the potential to make their lives significantly better than ours.
European Pension Reforms: A study by Merrill Lynch
Jan Mantel & David Bowers, World Economics, March 2000
Are the present pension systems in Europe substainable? Can the pensions time bomb caused by demographic changes be defused? This study describes developments in Europe, but the theory, the problems and the solutions are similar for most developed nations in the rest of the world. The combination of declining labour market participation rates–which magnifies the demographic ageing problem on public finances–and expectations of future ageing of the population will make most public retirement schemes expensive to run and major reforms are necessary. European governments have a number of options to compensate for the negative effects of ageing on pensions. The most effective strategy is to increase the effective and/or official retirement age. But only a combination of measures will be able to take away completely the negative financial effect of ageing on state pension schemes. What is clear from the study is that most measures to be taken to combat the situation will include some form of pain: the pensioner or the present generation of workers or governments’ finances or all of them together will suffer some negative consequences.

Pension Reform in Germany: To fund or not to fund
Axel Börsch-Supan, World Economics, March 2000
German public retirement insurance is in many respects an extreme example of the typical European pay-as-you-go pension system because almost 85% of retirement income stems from this system and only 15% comes from private sources such as funded pensions, labour income, and family transfers. Public retirement insurance has come under severe pressure from population ageing and incentive effects reducing labour supply. This paper argues that pre-funding a significant part of the German system will alleviate both pressures.

The Public/Private Mix in UK Pension Policy
Phil Agulnik & Nicholas Barr, World Economics, March 2000
The UK government aims to shift the balance between public (Pay-As-You-Go) and private (funded) pensions from 60:40 today to 40:60 by 2050 (UK DSS 1998). What is the economic rationale for this shift? Funding pensions may have a positive effect on economic growth and the long-term sustainability of the public finances, but such a move is only one of a menu of policies capable of achieving these outcomes. It follows that some other ratio between public and private provision would be possible, and there are a range of policy directions open to the government.

Achieving the goals of UK Pension Reform
Frank Field, World Economics, March 2000
There is an inevitable tension between the aim of providing enough income in retirement for those genuinely unable to build up a sufficiently large fund of their own and the aim of preserving people’s incentives to save for their own retirement. The author argues that if the current UK government’s proposals for pension reform are implemented, a significant proportion of the working population will have their incentives for retirement saving undermined and this situation will become a further hurdle in the way of successful pensions reform.