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DISCUSSION PAPER PI-9905

Does It Matter What Type of Pension Scheme You Have?

David Blake

ABSTRACT

If you are concerned about your pension, then the type of pension
scheme you have matters considerably. Because of demographic
problems, unfunded state pension schemes are unlikely to be sustainable,
unless the real growth rate in pensions is severely constrained. In contrast,
the high real returns available in the world's capital markets make it more
likely that funded pension schemes will be able to deliver the pension
promise. But there is an important choice to make between the two key
types of funded pension scheme: defined benefit and defined contribution.
There are both costs and benefits to each type of scheme. Most schemes
being established today in the UK and elsewhere are defined contribution,
despite the fact that such schemes are often associated with high costs, a
wide dispersion in investment performance and annuities that are poor value
for money. Your pension scheme can also change the way you behave: it
can alter your investment portfolio, change your pattern of savings and
consumption behaviour, and influence the decision about when you retire.

ISSN 1367-580x.