The more that fiscally constrained governments chip away at state schemes, the more workers will rely on their occupational benefits to reach a decent level of retirement income.One version of defined ambition, which attempts to give workers some certainty, is a "notional" defined-contribution plan.
And rather than pay benefits out of a pot of past contributions, notional accounts remain empty, leaving pensions to be financed from current taxes, sometimes supplemented by a central trust fund.Even if China's pension contributions were zealously guarded, they would fall short of the amounts required.
This new approach, the subject of a weighty book just published by the World Bank*, is based on "notional" (or non-financial) defined contributions (NDCs) by workers.
Unlike traditional benefits, which are only loosely linked to lifetime contributions, the annuities from notional accounts are actuarially fair: you get out what you put in.Reality checkIt would be wrong to think that NDCs, despite their merits, can solve all the problems of public-pension systems at a stroke.
But rather than relying on the financial markets to turn contributions into fatter pension benefits, notional schemes work on an actuarial formula that takes account of how well the economy has done and how long someone is expected to live.
Non-financial-defined-contributions pension programs––also known as notional accounts––are totally unfunded (e.g. PAYG), and yet they are DC and also exhibit high degrees of actuarial fairness.
However, it has since recognised the potential of notional accounts, which establish a tight link between payroll contributions and eventual pension benefits.
Rises in productivity growth, however, will work in the other direction.In effect, notional accounts force the adjustment caused by demographic change on to benefits rather than contributions.
Central to the plans, devised over the last year by a 31-strong policy commission under the MEP Chris Huhne, is a scheme to earmark national insurance contributions specifically for the NHS, while funding state pensions - traditionally financed out of a notional NI pot - out of general taxation.
Although these contributions are in fact used to pay for the pensions due today, they are also counted towards notional accounts, which mimic the actual ones found in privately funded defined-contribution (DC) schemes.
The notional capital in these accounts earns a return equal to the growth in the national wage-bill on which the contributions are levied.
