Pension policy design: The core issues

The last two decades have been characterised by significant changes in national pension arrangements. While at first, a consensus seemed to be evolving around a one-size-fits-all reform, more recently the trend has been towards a better customisation of reforms. This paper reviews this process, focusing on five pension policy design issues. These are how policymakers have sought to optimise poverty alleviation effectiveness; the redefinition of the state’s role in smoothing incomes over the life-course; the balancing of contributions to benefits; adjusting the system to be more responsive to demographic, economic and social changes; and ensuring that reforms will be long-lasting. While the role of state pensions still appears to be on a diminishing path, there has been a growing realisation of the need to ensure that they remain adequate. This has led to the setting up of innovative minimum pension schemes and credits for periods of childcare and unemployment. The expanding role of private pensions has also led governments to intervene more in their operation. Policymakers have shown strong interest in automatic adjustment mechanisms, to try to bring about required economic changes. However there is greater understanding that for the latter to happen, the state has to engage more with its citizens. While changes in pension systems can help societies respond to the ageing transition, for instance by removing incentives to retire too early or by aligning better the generosity of benefits to contributions made, there will need to be a much broader policy response.