Notional Defined Contribution : A Comparison of the French and the German Point Systems

The paper discusses similarities and differences between NDC and the French and German point systems. The study focuses on how these systems differ when there is an external shock (demographic, economic, or other) and discusses the possible consequences of moving from the point system to NDC. The French point system—because it does not have automatism in its indexing device —can be regulated each year according to forecasts. The paper concludes that this may be the best way to react to changes in the economic and demographic environment. However, to do so this requires, first, reliable and frequent forecasts, and, second, total independence of the governing board of the scheme from the retiree and worker lobbies. While the second requirement can be handled with rules, as opposed to the current state of affairs, it is questionable as to whether the first requirement can be fulfilled. Germany has adopted a method to correct the excessive generosity of the scheme with what the author calls a “return spring”—a mechanism in which the pension yield is lowered in relation to a desired contribution rate. This mechanism is reinforced by the “Rürup sustainability factor,” which explicitly introduces the dependency ratio and accounts for life expectancy changes. With this strategy, it is probable that the German scheme will move into surplus within some years, allowing for a reserve that might be needed for intergenerational transfers. The paper concludes by asking the question, why introduce NDC ? The author’s answer is that financial defined contribution (FDC) schemes promote individual responsibility, while NDC maintains the principle of social cohesion in public pension schemes.