This document summarizes pension reforms in Italy, Latvia, Poland, and Sweden that introduced notional defined contribution (NDC) pension systems. It outlines key features of the NDC designs such as individual accounts, contribution rates, retirement ages. It also discusses challenges faced by NDC systems including maintaining accurate individual account records, ensuring adequate replacement rates for low earners, and balancing pension costs with demographic changes. Overall the reforms aim to improve financial sustainability, fairness between generations, and transparency of pension benefits.

1. Agnieszka Chłoń-Domińczak
World Bank Pension Core Course, Washington, April 9th, 2013

2.  Individual contributions are noted on individual
accounts.
◦ NDC – contributions pay for benefits of current pensioners
◦ FDC – contributions are prefunded
 Accounts earn an “internal” rate of return:
◦ NDC – based on (nominal) covered per capita wage &
covered labor force growth
◦ FDC – (nominal) financial market rate of return
 Retirement from any age after a minimum age.
 Life “annuity” based on individual’s account balance
and cohort (unisex) life expectancy at retirement.
 Annuity rate of return (or indexation)
◦ NDC - based on (nominal) covered per capita wage &
covered labor force growth
◦ FDC – based on the financial rate of return.
2

3.  Individual accounts give transparency
They state clearly the individual claim on aggregate liabilities.
 Intra-generational fairness
A unit of contributions gives the same pension increment – same transfer
of consumption from the present to the future - for all.
 Intergenerational fairness.
Individuals in all generations pay the same rate on earned income into
pensions. (The share of GDP going to pensions is the same over all
generations.)
 Social policy through non-contributory rights
e.g., for early years of childcare (financed with general revenues).
 Accounts can be shared between spouses/legal
partners
During the accumulation period and/or joint annuities can be created at
retirement.

4.  Basic equations
At macro level:
At individual level:
𝑃𝑒𝑛𝑠𝑖𝑜𝑛 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 =
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑒𝑛𝑠𝑖𝑜𝑛
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑤𝑎𝑔𝑒
×
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑛𝑠𝑖𝑜𝑛𝑒𝑟𝑠
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟𝑠
𝑃𝑒𝑛𝑠𝑖𝑜𝑛 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 =
𝑖𝑛𝑑𝑖𝑣𝑖𝑑𝑢𝑎𝑙 𝑝𝑒𝑛𝑠𝑖𝑜𝑛
𝑖𝑛𝑑𝑖𝑣𝑖𝑑𝑢𝑎𝑙 𝑤𝑎𝑔𝑒
×
𝑝𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝑟𝑒𝑡𝑖𝑟𝑒𝑚𝑒𝑛𝑡
𝑝𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝑤𝑜𝑟𝑘𝑖𝑛𝑔

5. Italy, Sweden, Latvia and Poland

6. ◦ Two western European countries with:
 need to keep social expenditure under control
 with lower economic growth prospects
 population ageing
◦ Two transition economies with:
 the Latvian economy was turned upside down by the
collapse of the Soviet system
 Inadequate and inefficient pension system inherited
from the Soviet times, with widespread special
conditions and early retirement provisions
 need to promote growth of the formal sector of the
economy
 population ageing

7. Italy Latvia Poland Sweden
Contribution
rate on
earnings
33% (employees)
20% (self-employed)
24% (atypical
contracts)
20% 19.52% 18.5%
NDC
33% (employees)
20% (self-employed)
24% (atypical
contracts)
14% from 2012
12.22%
From 2011:
17,22%
16.0%
FDC
Voluntary scheme 6% from 2012
7.3%
From 2012:
2,3% going up
to 3,5%
2.5%
Occupational
and voluntary
schemes
20% of labour force
in 2008
Yes, but very
low coverage
Yes, but very
low coverage
Yes,
supplement
under ceiling;
whole benefit
above
Reform Overview - Overall DC framework and
contribution rates

8.  Credits for periods outside employment
◦ Differences in disability treatment
◦ Common recognition of unemployment, maternity
and periods of care of younger children
 Inheritance gains (mortality credits)
◦ Sweden distributes to remaining active accounts
◦ Indirectly used to finance transition (to FDC, to
cover for unbalanced PAYG expenditure)
 Notional interest rate
◦ Per capita wage in Sweden
◦ GDP growth in Italy
◦ Wage sum growth in Poland and Latvia

9. Country Oldest cohort covered Recognition of acrrued rights
Italy initially mandatory for
cohorts born after
1960, in 2010
expanded for older
ones
Two parts of pension: from old
and new schemes
Latvia all contributors covered
from the beginning
Re-computation of past
contributions based on work
histories
Poland cohorts born after 1949 New pension calculated based on
existing records, mixed old-new
formula applied
Sweden cohorts born after 1941 Initial capital based on old
pension formula

10. Source: Jabłonowski and Müller (2013) based on 1% ZUS sample

11. Retirement age
discussion continues…
… but increase in
participation rate expected.
 Continuing debate on retirement
age:
◦ Italy: complex changes with
final equal retirement age and
increases linked to life
expectancy
◦ Latvia: retirement age equalized
at age 62 as a part of reform
package. Present discussions of
increase to 65.
◦ Poland: retirement age
equalization and increase to 67
from 2013 to 2040
◦ Sweden: incentives with NDC
seem to help raising actual
retirement age
0
5
10
15
20
25
Sweden EU27 Italy Poland
15-64 15-71 55-64
Source: Commission services, EPC.
Estimated impact of pension reform on
participation rates (2020),
in percentage points

12. Close link between earnings and
benefits – deviation at bottom and
top of wage distribution
Despite different role of pillars
– relatively similar outcomes
Italy Latvia Poland Sweden
0.30 0,99 1,08 0,96 1,04
0.50 0,75 0,80 0,74 0,79
0.75 0,75 0,80 0,75 0,67
1.00 0,75 0,77 0,75 0,64
1.50 0,77 0,73 0,75 0,81
2.50 0,78 0,70 0,77 0,88
Net replacement rates in the future by
wage level
Based on the OECD pension models

13. Source: The OECD Pension Models.
-0.06
-0.04
-0.02
0.00
0.02
0.04
1 year 2 years 3 years
Italy
gross loss compensation
-0.06
-0.04
-0.02
0.00
0.02
0.04
1 year 2 years 3 years
Latvia
gross loss compensation
-0.06
-0.04
-0.02
0.00
0.02
0.04
1 year 2 years 3 years
Poland
gross loss compensation
-0.06
-0.04
-0.02
0.00
0.02
0.04
1 year 2 years 3 years
Sweden
gross loss compensation

15. ◦ Latvia
 Reduced FDC contribution
 Reduced newly granted early retirement pensions
◦ Poland – good economic performance with maintained small GDP
growth but high budget deficit
 Social Insurance Fund deficit covered with commercial loans and state
budget loan – SIF can also borrow from Demographic Reserve Fund
 Demographic Reserve Fund finances part of expenditure
 Reduced FDC contribution
 Increase of retirement ages as a long-term change agenda
◦ Sweden
 Automatic balancing mechanism initiated
 Negative indexation of benefits
◦ Italy
 No specific adjustment
 Risk of future ad hoc measures?

16. Source: Jabłonowski and Müller (2013)

17. Source: Jabłonowski and Müller (2013)

18. Source: Jabłonowski and Müller (2013)

20.  NDC formula uses life expectancy for the
entire population
 Risk of bias if the system covers only the part
of workforce
◦ Deficit in the financing if actual life expectancy of
the covered group is higher than for the entire
population

21.  DC systems both nonfinancial and financial
have strong link between lifetime earnings
and pensions
 Risk of low pensions for people with shorter
working careers and low wage levels

22.  NDC system requires maintenance of individual
accounts
◦ For the entire working population
◦ For long periods of work
◦ Contributions that are not assigned and not registered and
do not increase individual’s pension rights.
 This requires:
◦ Prepared social security administration
◦ Well-designed communication channels between all
stakeholders: social security institutions, employers, banks
and individuals
◦ Good quality unique ID numbers
 Revision of existing numbers (if exist)
 Establishing a new one (costly and complicated)

23.  Regularly revised life expectancy information
 Indexation information:
◦ Wage growth and labour force growth
 Record keeping

24.  Quality of information must be assured
 All participants are equally responsible for
adequate performance of the system
 Computer system is important….
 …. as well as system managers
 Proper identification should be ensured
 Procedures should be designed to avoid
errors

25. 70%
80%
90%
100%
Septem
ber2001
D
ecem
ber2001M
arch
2002
June
2002
Septem
ber2002
D
ecem
ber2002M
arch
2003
June
2003
Septem
ber2003
D
ecem
ber2003M
arch
2004
June
2004
Identification of employers Identification of employees
Formal control Identification of payments
Overall efficiency

26.  Simple and
understandable
message to individuals
 Annual pension
statements
 On-line access to the
OA account

28. Country 2010 2020 2040 2060
Change
2010-2060
Italy 15,3 14,5 15,6 14,4 -0,9
Latvia 9,7 7,3 6,3 5,9 -3,8
Poland 11,8 10,9 10,3 9,6 -2,2
Sweden 9,6 9,6 10,2 10,2 0,6
EU27 11,3 11,3 12,9 12,9 1,5
Source: 2012 Ageing Report, European Commission.

29. 0
100
200
300
400
500
600
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Simulation: value of OA pension for 100 000 currency unitis
for 65-year old in Poland
OA Pension Reduction due to life expectancy change
Source: own calculation based on GUS data

30. Source: Orange report 2011

31. Source: 2012 Ageing Report, European Commission.

32. Source: 2012 Ageing Report, European Commission.
-3
-2
-1
0
1
2
3
4
2010-2020 2020-2030 2030-2040 2040-2050 2050-2060
Italy
Dependency ratio contribution Coverage ratio contribution
Employment effect contribution Benefit ratio contribution

33.  In the long-run the NDC pension system reaches
financial balance (as expected in DC system)
 Strong link between contributions and benefits in
the NDC encourages participation, but requires
long working lives and stable wages
 NDC offers transparency and stable financing,
but needs high coverage, long working lives and
good administration

34.  Chlon-Dominczak, Franco and Palmer (2012), The First Wave
of NDC Countries – Taking Stock Ten Plus Years Down the
Road - Sweden, Poland, Latvia and Italy in: Holzmann, R., E.
Palmer and D. Robalino. 2012, eds. NDC Pension Schemes in
a Changing Pension World, Volume 1: Progress, Issues, and
Implementation. Washington D.C.: The World Bank & Swedish
Social Insurance Agency.
 Jabłonowski, J. and Müller, C. (2013), 3 sides of 1 coin –
Long-term Fiscal Stability, Adequacy and Intergenerational
Redistribution of the reformed Old-age Pension System in
Poland , National Bank of Poland
 European Commission (2012), Ageing Report 2012.