Notional defined‐contribution schemes: Old wine in new bottles?

Abstract

Until recently, most pension benefit formulae in social security schemes resembled each other. They were all defined‐benefit formulae that were either generous or mean, while defined‐contribution formulae were exclusively used in private and occupational pension schemes and some national provident funds. Then came the mandatory retirement savings model, introduced in Chile and subsequently in other Latin American countries. It did not seem possible that such a formula could be used on any large scale in the pay‐as‐you‐go environment of OECD pension schemes. In the early 1990s, however, Swedish social security experts devised the notional defined‐contribution (NDC) system: individual social insurance pension contribution records are converted into a fictitious savings amount at retirement, whereupon the defined‐contribution approach is followed. This article analyses how much of this approach is new. The conclusion is that it is a novel pension policy instrument rather than a new type of pension formula, and most of its potential financial and distributive effects could also be achieved by a classical, linear defined‐benefit formula. It is the packaging that differs and, in politics, that often is what matters.

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