Pensions policy is a very broad area that touches on most areas of financial economics, including capital markets, asset pricing, investment policy, incentives and agency, tax policy, corporate finance, and accounting as well as other disciplines such as law and social policy. Research initiatives at Warwick Business School that are specifically related to pensions have focussed on three main areas:

• Long-term savings policy and the capital markets

• Guaranteeing of defined benefit pension schemes

• Annuity markets

Anthony Neuberger, together with David McCarthy of the Tanaka Business School, Imperial College,  has produced a substantial report “Pensions Policy: Evidence on Aspects of Savings Behaviour and Capital Markets” for the Centre for Economic Policy Research which surveys the evidence of four key areas in pensions policy: the impact of demography on capital markets, the functioning of the annuities market, the role of employers in pensions saving and the impact of tax incentives on savings behaviour. The study finds that the evidence linking demographics to asset returns is weak; this is consistent with theoretical analysis that suggests that any effects will be spread over many years and would be hard to observe empirically. On the annuities market, the study seeks to explain why the degree of voluntary purchase is so low, and finds that adverse selection and weak competition among providers, though both being significant, provide only a part of the explanation. Employer provided Defined Benefit pension schemes do not appear to increase productivity, but they do seem to play an important role in increasing length of tenure and in the retirement decision. They may also play a role in attracting particular types of worker. The extensive research on the impact of tax incentives on savings behaviour was also reviewed. The results are far from conclusive with the evidence supporting estimates of anywhere between 0% and 70% of tax-sheltered saving being incremental saving.

Anthony Neuberger and David McCarthy have also looked at the operation of the Pension Protection Fund (PPF) that has recently been set up by Government to guarantee private sector defined benefit pension schemes. They construct a simplified model of  the PPF and show that it is likely to face a very volatile claims process, with periods of relatively low claims being punctuated by periods of very high claims as a period of substantial downturn in the equity markets coupled with substantial bankruptcies  would create a great increase in the number of defaulting plans at the same time as pension plans are most severely underfunded. They analyse the premium policy that the PPF could follow, and conclude that under realistic scenarios, the Government may well be forced to intervene to ensure that the guarantee is honoured.

Yaari (1965) in a classic paper, showed that a rational investor with no interest in bequests, should annuitise all their wealth, and this conclusion would remain valid even if annuities were over-priced. The argument in essence is that money left over when you die is a sign of poor planning; had you bought life annuities, you would have died poorer but lived better. Evidence from around the world however suggests that investors rarely buy life annuities except when they are forced to do so. In theoretical research, Anthony Neuberger has analysed how much of their wealth someone should put into life annuities if they have no desire to leave money when they die. The analysis focuses on two features of life annuities: they are irreversible – once you have bought an annuity it is difficult or impossible to cash it in; and annuities are bond like – by buying an annuity, you are effectively putting your money into the bond market. By analysing the portfolio decision of the individual investor taking account of irreversibility, he shows that it is optimal to keep a substantial proportion of the portfolio in cash or equities, particularly for an investor who is younger, with more risk tolerance and with higher expectations of the equity risk premium. The proportion of wealth that should be annuitised is not very sensitive to the pricing of annuities, which suggests that adverse selection and weak competition, which together may have increased the effective price of annuities, are not likely by themselves to account for the limited degree of voluntary annuitisation seen internationally.