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Ontario Teachers Pension Plan: Asset Allocation Decision

Evolving Retirement Systems. The Extended FamilyWorking members share income with retireesDefined benefit pensionsWorkers accept lower salariesRetirees receive relatively fixed paymentsDefined contribution pensionsWorkers save to provide benefits for their own retirement years. The Extended Fa

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Ontario Teachers Pension Plan: Asset Allocation Decision

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    1. Ontario Teachers Pension Plan: Asset Allocation Decision

    2. Evolving Retirement Systems The Extended Family Working members share income with retirees Defined benefit pensions Workers accept lower salaries Retirees receive relatively fixed payments Defined contribution pensions Workers save to provide benefits for their own retirement years

    3. The Extended Family Workers sacrifice consumption to provide consumption for retired Parents Bad times are shared by retirees and workers Retirees have an equity claim on economic output

    4. Defined Benefit Pensions Workers sacrifice consumption through lower wages to pay for retirement benefits Retirees are paid amounts that are fixed in currency terms, or fixed in real terms Retirees have relatively fixed claims on economic output Formally, claims are fixed But terms may have to be revised in adverse times Implicit partial equity characteristics

    5. Defined Contribution Pensions Worker and/or employer make contributions to a retirement account Amount received by the worker in retirement depends on Amounts contributed Actuarial factors Investment returns

    6. The Swedish Pension System The Notional Defined Contribution System 16% of salary contributed Partially funded Investment return based on Increase in an index of average income, or Approximate rate of return in the system The Financial Defined Contribution System 2.5% of salary contributed Fully funded Individual can choose as many as 5 of 500 investment funds

    7. Defined Contribution Pensions Workers and retirees typically have some discretion over types of claims purchased (fixed, equity or both) Growing use in both private and public retirement systems More amenable to risk-sharing between workers and retirees

    8. Demography and the Growth of Defined Contribution Pensions Ratio of retirees per worker increasing With fixed claims for retirees, worker claims would be highly leveraged Allocation of risk would be suboptimal Defined contribution plans can Provide equity characteristics Allow workers to choose levels of risk Facilitate a more optimal allocation of risk among workers and retirees

    9. Risk-sharing in a Simple Economy Economic Output Retirees Workers

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