DISCUSSION PAPER PI-1114
The Value and Risk of Defined Contribution Pension Schemes: International Evidence
Edmund Cannon and Ian Tonks
We use historical data on investment returns and labour income from sixteen
countries to quantify the value and risk of defined contribution pension plans,
building frequency distributions of pension fund and pension replacement ratios
for each country. We show that pension risk is substantial, and find that
pension fund ratios are lower and less variable than when the correlation
between wage growth and investment returns is ignored: typically halving the
median pension fund ratio. We also show that an all-equity fund is the dominant
investment strategy across all countries, although sometimes a life-cycle
strategy insures against downside risk.
JEL Classification: E62, G14, H55
Keywords: Risks, defined contribution pension schemes, pension replacement ratio.