Topic 1: Introduction
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Financing old age or pensions are a major concern for public policy and individuals as they will determine future outcomes for old age poverty; economic growth and the health of public finances. On a more positive note they also have the potential for financing intertemporal transformative choices relating to climate change and sustainability of social and economic systems.
Longevity has been rising across the world. More relevant to retirement, life expectancy at age 60 has also been on the increase. (Global Health Observatory Data of the World Health Organization). For example, in Canada, life expectancy at age 60 went up from 22.7 years in the year 2000 to 25.7 years in the year 2016. With rising longevity there is a growing concern whether individuals and societies are prepared to take on the responsibility of financing retirement at expected and sustainable levels. A recent analysis notes a decline in the rate of increase of life expectancy in developed countries since 2011. However, the long-term outlook of longevity increases and impact on sustainability of pensions remains uncertain.
From a finance perspective there is another reason why we need to study pensions. Much of what we discuss in standard finance curriculum assumes an individual decision maker motivated by self interest and capable of utilizing all available information in its decisions. However, as Global Asset Tables show (Wills Towers Watson, 2018), most financial assets are managed in institutional settings where agency conflicts are typical. In an organizational or institutional setting, multiple decision makers are involved in principal agent relationship. Given their differing objective functions, agency conflicts will be pervasive. It is important that we explore how stylized decision rules of finance play out in an organizational setting. The pension sector is an example of a sector where decisions are taken in an institutional setting and agency conflicts are endemic. As a sector it offers a unique opportunity to explore how financial decisions are taken in an institutional setting with inherent agency conflicts.
The Three Major Financial Decisions
Financing education, home ownership and old age are three major personal financial decisions that an individual or a household will make over their lifetime. Of the three, financing old age is the more complex decision. Education and home ownership decisions are relatively less challenging for an individual as the costs are over the long-term and are contractual. Also, the benefits of these decisions become apparent almost immediately. If you enroll in an educational program you gain knowledge, skills and understanding. You improve your career and earning prospects in the medium and long-term, and experience other socio-economic benefits over a lifetime and over generations. When you buy a house, you start living in it and experience a change in your cash outflow from paying rent to contributing