Policy Considerations for Hedging Risks in Mandatory Defined Contribution Pensions Through Better Default Options

The financial turmoil of 2008 highlighted the importance of default investment options in mandatory defined contribution pensions. Their design can improve the scope for intertemporal risk diversification for individuals and increase the likelihood of achieving adequate replacement rates during retirement. This topic is relevant to several countries in Latin America and Eastern Europe that have recently adopted the “multi-fund” design for investment choices and default options and the many more that are currently considering the adoption of similar products in the coming years. This chapter assesses the design and regulation of default investment choices in mandatory defined contribution pensions as they have been recently adopted in countries like Chile, Peru, Mexico and Hungary. It also suggests policies aimed at improving their risk diversification properties