Dr DAVID BLAKE is Professor of Pension Economics and Director of the Pensions Institute at Cass Business School, London, and Chairman of Square Mile Consultants, a training and research consultancy. He was formerly Director of the Securities Industry Programme at City University Business School, Research Fellow at both the London Business School and the London School of Economics and Professor of Financial Economics at Birkbeck College, University of London. He is consultant to many organisations, including Merrill Lynch, Deutsche Bank, Union Bank of Switzerland, JPMorgan, McKinsey & Co., the Financial Services Authority, the Office of Fair Trading, the Office for National Statistics, the Government Actuary’s Department, the National Audit Office, the Department for Work and Pensions, HM Treasury, the Bank of England, the Prime Minister’s Policy Directorate and the World Bank. In June 1996, he established the Pensions Institute, which undertakes high-quality research on all pension-related issues and publishes details of its research activities on the internet (http://www.pensions-institute.org).

"I have never seen such a concise description of pension institutions that was so crystal clear." (Investments & Pensions Europe, February 2007) "Informative without being patronizing and set out in a logical sequence with each chapter containing questions to help the reader consolidate what they have just learnt." (Pensions Age, December 2006)"If you are looking for a solid grounding in the theory and practice of economics in relation to pensions this is a vital addition to your bookshelf." (.net, August 2007)

• Preface xi1 Introduction1.1 What is pension economics? 11.2 Types of pension scheme 31.3 Conclusions 10Questions 10References 112 Individual Pension Decision Making 132.1 The lifecycle model 132.2 Pensions and savings 192.2.1 Unfunded state pension 192.2.2 Private funded pension 202.3 Pensions and retirement decisions 232.3.1 No pension 232.3.2 Private funded pension 242.3.3 Unfunded state pension 252.3.4 Unfunded state pension with private funded pension 262.4 Empirical studies testing the validity of the lifecycle model 282.5 The Feldstein lifecycle model with induced retirement 302.5.1 The consumption decision 322.5.2 Retirement behaviour 372.5.3 Discussion 382.6 Conclusions 39Questions 40References 413 Corporate Pension Decision Making 473.1 The provision of pensions by corporations 473.2 The role of pensions in employment contracts 483.2.1 Pensions as altruism 483.2.2 Pensions as deferred pay 493.2.3 Pensions as contingent claims 603.3 The nature of corporate pension liabilities 613.4 Quitting and mandatory retirement 643.4.1 Quitting 643.4.2 Mandatory retirement 663.5 Tax and pension fund policy 683.6 Agency costs in pension schemes and pension funds 713.6.1 Insider-trustees 723.6.2 Underfunding the pension scheme 753.6.3 Performance-related fund management fees 803.6.4 Shareholder activism and corporate governance 813.6.5 Moral hazard, adverse selection and disability pensions 823.7 Conclusions 83Questions 84References 854 Pensions in the Diamond–Samuelson Overlapping Generations Model with Certain Lifetimes 894.1 The two-period Diamond–Samuelson OLG model 904.1.1 Individuals 914.1.2 Firms 984.1.3 Market equilibrium 1004.1.4 Dynamics, stability and the steady state 1014.1.5 Optimality and efficiency 1034.2 Pensions in the Diamond–Samuelson OLG model with exogenous labour supply and retirement 1054.2.1 State pension scheme 1064.2.2 The equivalence of PAYG and government debt 1174.2.3 Transitional and welfare effects 1204.2.4 From PAYG to a funded pension scheme 1214.3 PAYG pensions in the Diamond–Samuelson OLG model with endogenous labour supply and retirement 1224.3.1 Individuals 1224.3.2 Market equilibrium 1254.3.3 The steady state 1264.3.4 Welfare effects 1294.3.5 From PAYG to a funded pension scheme 1324.4 Conclusions 132Questions 133References 1355 Pensions in the Blanchard–Yaari Overlapping Generations Model with Uncertain Lifetimes 1375.1 The Blanchard–Yaari OLG model with uncertain lifetimes 1375.1.1 Yaari’s contribution 1375.1.2 Blanchard’s contribution 1425.1.3 Individuals 1425.1.4 Aggregate consumption 1445.1.5 Firms 1475.1.6 Government and market equilibrium 1485.1.7 The phase diagram 1495.2 PAYG pensions in the Blanchard–Yaari OLG model with endogenous labour supply and mandatory retirement 1525.3 Conclusions 154Questions 155References 1566 The Economics of Ageing and Generational Accounting 1576.1 The macroeconomic effects of ageing: Declining population growth and the increasing dependency ratio 1576.2 Pensions in the Diamond–Samuelson OLG model with a variable population growth rate 1616.3 Generational accounting 1646.4 Conclusions 167Questions 168References 1687 Risk Sharing and Redistribution in Pension Schemes 1717.1 Risks in private pension schemes 1747.2 Risk sharing in personal pension schemes 1757.3 Risk sharing in occupational pension schemes 1777.3.1 Complete markets 1787.3.2 Incomplete markets 1807.4 Redistribution in private pension schemes 1887.5 Private sector market failure and the compensating role of state pension schemes 1917.6 Risks in state pension schemes 1927.7 Risk sharing in state pension schemes 1967.7.1 The family 1977.7.2 Social security pension system 1987.8 Redistribution in state pension schemes 2067.9 The viability of PAYG state pension systems and the transition costs to funding 2067.9.1 Viability 2067.9.2 The transition deficit 2107.10 Conclusions 213Questions 215References 2178 Behavioural Pension Economics 2218.1 The accumulation phase 2228.1.1 The savings decision 2228.1.2 The investment decision 2278.2 The decumulation phase 2388.2.1 Longevity risk 2388.2.2 Inflation and capital market risk 2398.3 Conclusions 240Questions 242References 243Index 249

Dr DAVID BLAKE is Professor of Pension Economics and Director of the Pensions Institute at Cass Business School, London, and Chairman of Square Mile Consultants, a training and research consultancy. He was formerly Director of the Securities Industry Programme at City University Business School, Research Fellow at both the London Business School and the London School of Economics and Professor of Financial Economics at Birkbeck College, University of London. He is consultant to many organisations, including Merrill Lynch, Deutsche Bank, Union Bank of Switzerland, JPMorgan, McKinsey & Co., the Financial Services Authority, the Office of Fair Trading, the Office for National Statistics, the Government Actuary’s Department, the National Audit Office, the Department for Work and Pensions, HM Treasury, the Bank of England, the Prime Minister’s Policy Directorate and the World Bank. In June 1996, he established the Pensions Institute, which undertakes high-quality research on all pension-related issues and publishes details of its research activities on the internet (http://www.pensions-institute.org).

"I have never seen such a concise description of pension institutions that was so crystal clear." (Investments & Pensions Europe, February 2007) "Informative without being patronizing and set out in a logical sequence with each chapter containing questions to help the reader consolidate what they have just learnt." (Pensions Age, December 2006)"If you are looking for a solid grounding in the theory and practice of economics in relation to pensions this is a vital addition to your bookshelf." (.net, August 2007)

• Preface xi1 Introduction1.1 What is pension economics? 11.2 Types of pension scheme 31.3 Conclusions 10Questions 10References 112 Individual Pension Decision Making 132.1 The lifecycle model 132.2 Pensions and savings 192.2.1 Unfunded state pension 192.2.2 Private funded pension 202.3 Pensions and retirement decisions 232.3.1 No pension 232.3.2 Private funded pension 242.3.3 Unfunded state pension 252.3.4 Unfunded state pension with private funded pension 262.4 Empirical studies testing the validity of the lifecycle model 282.5 The Feldstein lifecycle model with induced retirement 302.5.1 The consumption decision 322.5.2 Retirement behaviour 372.5.3 Discussion 382.6 Conclusions 39Questions 40References 413 Corporate Pension Decision Making 473.1 The provision of pensions by corporations 473.2 The role of pensions in employment contracts 483.2.1 Pensions as altruism 483.2.2 Pensions as deferred pay 493.2.3 Pensions as contingent claims 603.3 The nature of corporate pension liabilities 613.4 Quitting and mandatory retirement 643.4.1 Quitting 643.4.2 Mandatory retirement 663.5 Tax and pension fund policy 683.6 Agency costs in pension schemes and pension funds 713.6.1 Insider-trustees 723.6.2 Underfunding the pension scheme 753.6.3 Performance-related fund management fees 803.6.4 Shareholder activism and corporate governance 813.6.5 Moral hazard, adverse selection and disability pensions 823.7 Conclusions 83Questions 84References 854 Pensions in the Diamond–Samuelson Overlapping Generations Model with Certain Lifetimes 894.1 The two-period Diamond–Samuelson OLG model 904.1.1 Individuals 914.1.2 Firms 984.1.3 Market equilibrium 1004.1.4 Dynamics, stability and the steady state 1014.1.5 Optimality and efficiency 1034.2 Pensions in the Diamond–Samuelson OLG model with exogenous labour supply and retirement 1054.2.1 State pension scheme 1064.2.2 The equivalence of PAYG and government debt 1174.2.3 Transitional and welfare effects 1204.2.4 From PAYG to a funded pension scheme 1214.3 PAYG pensions in the Diamond–Samuelson OLG model with endogenous labour supply and retirement 1224.3.1 Individuals 1224.3.2 Market equilibrium 1254.3.3 The steady state 1264.3.4 Welfare effects 1294.3.5 From PAYG to a funded pension scheme 1324.4 Conclusions 132Questions 133References 1355 Pensions in the Blanchard–Yaari Overlapping Generations Model with Uncertain Lifetimes 1375.1 The Blanchard–Yaari OLG model with uncertain lifetimes 1375.1.1 Yaari’s contribution 1375.1.2 Blanchard’s contribution 1425.1.3 Individuals 1425.1.4 Aggregate consumption 1445.1.5 Firms 1475.1.6 Government and market equilibrium 1485.1.7 The phase diagram 1495.2 PAYG pensions in the Blanchard–Yaari OLG model with endogenous labour supply and mandatory retirement 1525.3 Conclusions 154Questions 155References 1566 The Economics of Ageing and Generational Accounting 1576.1 The macroeconomic effects of ageing: Declining population growth and the increasing dependency ratio 1576.2 Pensions in the Diamond–Samuelson OLG model with a variable population growth rate 1616.3 Generational accounting 1646.4 Conclusions 167Questions 168References 1687 Risk Sharing and Redistribution in Pension Schemes 1717.1 Risks in private pension schemes 1747.2 Risk sharing in personal pension schemes 1757.3 Risk sharing in occupational pension schemes 1777.3.1 Complete markets 1787.3.2 Incomplete markets 1807.4 Redistribution in private pension schemes 1887.5 Private sector market failure and the compensating role of state pension schemes 1917.6 Risks in state pension schemes 1927.7 Risk sharing in state pension schemes 1967.7.1 The family 1977.7.2 Social security pension system 1987.8 Redistribution in state pension schemes 2067.9 The viability of PAYG state pension systems and the transition costs to funding 2067.9.1 Viability 2067.9.2 The transition deficit 2107.10 Conclusions 213Questions 215References 2178 Behavioural Pension Economics 2218.1 The accumulation phase 2228.1.1 The savings decision 2228.1.2 The investment decision 2278.2 The decumulation phase 2388.2.1 Longevity risk 2388.2.2 Inflation and capital market risk 2398.3 Conclusions 240Questions 242References 243Index 249

Dr DAVID BLAKE is Professor of Pension Economics and Director of the Pensions Institute at Cass Business School, London, and Chairman of Square Mile Consultants, a training and research consultancy. He was formerly Director of the Securities Industry Programme at City University Business School, Research Fellow at both the London Business School and the London School of Economics and Professor of Financial Economics at Birkbeck College, University of London. He is consultant to many organisations, including Merrill Lynch, Deutsche Bank, Union Bank of Switzerland, JPMorgan, McKinsey & Co., the Financial Services Authority, the Office of Fair Trading, the Office for National Statistics, the Government Actuary’s Department, the National Audit Office, the Department for Work and Pensions, HM Treasury, the Bank of England, the Prime Minister’s Policy Directorate and the World Bank. In June 1996, he established the Pensions Institute, which undertakes high-quality research on all pension-related issues and publishes details of its research activities on the internet (http://www.pensions-institute.org).

"I have never seen such a concise description of pension institutions that was so crystal clear." (Investments & Pensions Europe, February 2007) "Informative without being patronizing and set out in a logical sequence with each chapter containing questions to help the reader consolidate what they have just learnt." (Pensions Age, December 2006)"If you are looking for a solid grounding in the theory and practice of economics in relation to pensions this is a vital addition to your bookshelf." (.net, August 2007)

• Preface xi1 Introduction1.1 What is pension economics? 11.2 Types of pension scheme 31.3 Conclusions 10Questions 10References 112 Individual Pension Decision Making 132.1 The lifecycle model 132.2 Pensions and savings 192.2.1 Unfunded state pension 192.2.2 Private funded pension 202.3 Pensions and retirement decisions 232.3.1 No pension 232.3.2 Private funded pension 242.3.3 Unfunded state pension 252.3.4 Unfunded state pension with private funded pension 262.4 Empirical studies testing the validity of the lifecycle model 282.5 The Feldstein lifecycle model with induced retirement 302.5.1 The consumption decision 322.5.2 Retirement behaviour 372.5.3 Discussion 382.6 Conclusions 39Questions 40References 413 Corporate Pension Decision Making 473.1 The provision of pensions by corporations 473.2 The role of pensions in employment contracts 483.2.1 Pensions as altruism 483.2.2 Pensions as deferred pay 493.2.3 Pensions as contingent claims 603.3 The nature of corporate pension liabilities 613.4 Quitting and mandatory retirement 643.4.1 Quitting 643.4.2 Mandatory retirement 663.5 Tax and pension fund policy 683.6 Agency costs in pension schemes and pension funds 713.6.1 Insider-trustees 723.6.2 Underfunding the pension scheme 753.6.3 Performance-related fund management fees 803.6.4 Shareholder activism and corporate governance 813.6.5 Moral hazard, adverse selection and disability pensions 823.7 Conclusions 83Questions 84References 854 Pensions in the Diamond–Samuelson Overlapping Generations Model with Certain Lifetimes 894.1 The two-period Diamond–Samuelson OLG model 904.1.1 Individuals 914.1.2 Firms 984.1.3 Market equilibrium 1004.1.4 Dynamics, stability and the steady state 1014.1.5 Optimality and efficiency 1034.2 Pensions in the Diamond–Samuelson OLG model with exogenous labour supply and retirement 1054.2.1 State pension scheme 1064.2.2 The equivalence of PAYG and government debt 1174.2.3 Transitional and welfare effects 1204.2.4 From PAYG to a funded pension scheme 1214.3 PAYG pensions in the Diamond–Samuelson OLG model with endogenous labour supply and retirement 1224.3.1 Individuals 1224.3.2 Market equilibrium 1254.3.3 The steady state 1264.3.4 Welfare effects 1294.3.5 From PAYG to a funded pension scheme 1324.4 Conclusions 132Questions 133References 1355 Pensions in the Blanchard–Yaari Overlapping Generations Model with Uncertain Lifetimes 1375.1 The Blanchard–Yaari OLG model with uncertain lifetimes 1375.1.1 Yaari’s contribution 1375.1.2 Blanchard’s contribution 1425.1.3 Individuals 1425.1.4 Aggregate consumption 1445.1.5 Firms 1475.1.6 Government and market equilibrium 1485.1.7 The phase diagram 1495.2 PAYG pensions in the Blanchard–Yaari OLG model with endogenous labour supply and mandatory retirement 1525.3 Conclusions 154Questions 155References 1566 The Economics of Ageing and Generational Accounting 1576.1 The macroeconomic effects of ageing: Declining population growth and the increasing dependency ratio 1576.2 Pensions in the Diamond–Samuelson OLG model with a variable population growth rate 1616.3 Generational accounting 1646.4 Conclusions 167Questions 168References 1687 Risk Sharing and Redistribution in Pension Schemes 1717.1 Risks in private pension schemes 1747.2 Risk sharing in personal pension schemes 1757.3 Risk sharing in occupational pension schemes 1777.3.1 Complete markets 1787.3.2 Incomplete markets 1807.4 Redistribution in private pension schemes 1887.5 Private sector market failure and the compensating role of state pension schemes 1917.6 Risks in state pension schemes 1927.7 Risk sharing in state pension schemes 1967.7.1 The family 1977.7.2 Social security pension system 1987.8 Redistribution in state pension schemes 2067.9 The viability of PAYG state pension systems and the transition costs to funding 2067.9.1 Viability 2067.9.2 The transition deficit 2107.10 Conclusions 213Questions 215References 2178 Behavioural Pension Economics 2218.1 The accumulation phase 2228.1.1 The savings decision 2228.1.2 The investment decision 2278.2 The decumulation phase 2388.2.1 Longevity risk 2388.2.2 Inflation and capital market risk 2398.3 Conclusions 240Questions 242References 243Index 249