Are defined contribution schemes socially sustainable? A conceptual map from a macroprudential perspective

If retirement income, provided by public and private defined contribution (DC) pension schemes, falls below socially acceptable standards, there is a political risk that consensus-seeker policymakers could yield to pressures to commit future fiscal revenues. These contingent liabilities, when incorporated in markets’ expectations, are bound to create spillovers on sovereign risk, with negative feedback loops on the capital adequacy of banks and of other intermediaries, owing to losses on government paper. Among the causes of reduced annuities out of final assets in DC pension funds is a shrinking equity risk premium, much lower than the values usually advertised by the industry or assumed by policymakers. From a macroprudential perspective, these contingent liabilities and their effects on sovereign risk should be taken into account in stress tests assessing banks’ resilience to financial shocks as well as in financial education programs aimed at boosting pension funds’ membership.