Pension Privatisation: Benefits and Costs

Abstract

During the last 10 years, many OECD countries introduced reforms which included automatic enrolment or mandatory participation in privately managed pension schemes. The current article aims to reveal the benefits and costs of privately managed pension schemes. The article uses a study of pension schemes’ bylaws in Israel to study the degree to which the shift to privately operated DC schemes results in the transfer of risk from capital to labour and in the entrenchment of gender and income inequalities. The article shows that the shift of pension provision from defined benefit (DB) to defined contribution (DC) entails a significant shift of risk from capital to labour. Moreover, separately from the DB to DC shift, moving from public management to private management increases employees’ pension risks. Lastly, the paper shows that the combination of the shifts from DB to DC and from public to private management involves a shift in governance, which exposes pension scheme members to a high likelihood of lower returns as well as to gender and income inequalities.