Notional accounts as a pension reform strategy : an evaluation

Abstract

This paper considers the implementation of, and rationale for, pension reforms based on notional accounts (sometimes known as notional defined contribution plans or NDCs). The distinguishing feature of such reforms is that a structure of individual accounts is established, in which contributions notionally accrue. No fund as such is established and the implicit"return"on such accounts is determined by a formula linked to some underlying index of long-run fiscal sustainability. the author contrasted this"third way"with two other reform strategies: a parametric reform strategy (favored by the IMF) in which the existing defined benefit plan was fixed up, and a transition strategy by which the pension scheme was largely converted to a set of individual funded accounts. After examining some early precedents for such schemes, and describing actual reform processes in a number of countries along notional accounts lines, a generic notional accounts reform was evaluated using thre broad criteria. From the literature survey and arguments presented here , the author concludes that whatever the advantages of the notional account reform, they do not dominate other strategies , especially those that introduce true diversification between unfunded and funded components.

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