Topic 1: Introduction

Sustainable and acceptable financing of retirement will require finance professionals who are not just narrowly focused on managing assets but understand the challenges to implementing stylized finance decision rules in an institutional setting. The eText recognises the diversity of viewpoints and decisions that are proposed towards sustainable pensions and financing of old  age retirement. This open textbook will bring together a body of knowledge that can inform us about how these lifetime financial accumulation and de-accumulation pension decisions are taken. There is no presumption that there is unanimity on what is the best approach to superior pension outcomes. The objective of this open access electronic textbook is to support professional and informed engagement on pensions and old age financial security in a finance curriculum by bringing together appropriate tools and concepts to support financing of retirement. The only starting premise of this eText is that a simple extrapolation of human behavior motivated by self-interest cannot be relied upon to counter the effects of the flipped nature of the cost benefit structure of savings for pensions and old age financial security.

This eText will support a more informed and comprehensive discussion of the financing of pensions that brings together insights from a variety of disciplines like psychology, biology, political science and of course economics. The dominant voices in the conversation on pensions are those of providers and the financial services industry. This results in outcomes that shift the responsibility of financial security to individuals, emphasize choice, and generate expectations about savings that cannot be delivered across the board for all. This could be either a deliberate response of vested interests, or a result of the lack of integration of the knowledge base that exists on pensions and old age financial security systems. For example, often the choice in occupational pension plans is presented as between defined benefit or a defined contribution plans. The response to the unsustainable defined benefit (DB) plans has been a growing adoption of defined contribution (DC) plans and policies aimed to promote private savings. Though this is consistently presented in policy discussions and labor market negotiations as a reasonable response, there is no evidence that it works for most individuals. Nevertheless, DC and private savings continue to be promoted at tremendous costs and uncertainty in contract negotiations and through tax incentives. It is instructive to note here that the data on DC plans such as the 401(K) plans in the US show a low level of average savings closer to retirement. Furthermore, in Canada data suggests that the popularity of DB plans continues to rise for plans with membership of 100 or less subscribers and contradicts the overall switch of large plans with 1000 or more members from DB to DC plans (Baldwin, 2017)

The discussion on pensions is a highly contested one and further complicated by the growing expectations gap. For the workforce and retirees, pensions are not only about financial sustenance of post working years, but also an earned option that enables working adults to withdraw from the workforce in their later years to pursue what they value. Gallup polls suggest that only one-third of employees are engaged in their work and workplace. Many employees work “pointless jobs” to which they feel indifferent ( BBC World Service, 2018;  Graeber, 2018). A financially secure retirement is a deferred wage that the workforce expects to rely onto pursue what they value.

Table 1 demonstrates that expectations from retirement are by no means universal. Different socio-economic and cultural segments have different expectations of retirement. An expectations gap emerges when the social contract to provide for old age is continuously being renegotiated by the requirements of competitiveness and profitability of the production system. The challenge to bridge this growing expectations gap is exacerbated by rising costs of healthcare, increasing longevity, labour market changes, and the goals and objectives of various interest groups associated with the financing and provisioning of retirement funds, such as the financial services industry.

Note. Adapted from Baldwin (2017), p. 3

What Will you Learn?

National pension systems are often discussed in terms of a five pillar typology developed by the World Bank (2005) based on its global over view of pension systems around the world. The five pillars are a mix of publicly or privately managed and funded or unfunded plans. Not all pillars are necessarily present or emphasised equally in a country’s pension system. How does a national pension system evolve its own unique mix and emphasis between these pillars? This will be the focus of our discussion in the next module. We analyze inter-temporal choice and the three different approaches to rationality: classical; bounded and ecological. We also explore social contracts that underpin all socio economic policies including pensions. These examinations allow us to develop a general approach to national pension systems and the basis of the choice and emphasis in the five pillar typology of the World Bank.

Next for a given pension system we evaluate consideration that will apply to an efficient implementation of a pension plan. Following Ambachtsheer (2016), we examine the provisioning of pensions as an integrated and interdependent system of design, governance, and investment principles.  Pension outcomes are visualized as an interactive and interdependent outcome of pension design (D), governance (G), and investment decisions (I) and we call this the DGI framework. Governance of pensions will depend upon its management (public or private) and funding status (funded or pay as you go from tax revenues). The governance and design will influence the choice of decision makers in the investment management of national pension systems. We will explore their inter dependencies and interaction between D, G & I in the subsequent modules.

The goal of a pension system is to promote funded pensions that are affordable to subscribers and sponsors and provide payment security. Affordability and payment security can be facilitated by examining the architecture of the pension organizations. An integrated view of the DGI architecture of pensions is shown in the figure above. The goal of pension provision is an integration of three principal interdependent considerations: design, governance, and investment . The challenge is to bring together this integration between design, governance and investment at the system, organizational and individual levels.

How is This Open Textbook Organized?

The organization of this open textbook acknowledges the contested nature of the field. There are opposing perspectives on individual responsibility and social contract and the use of collective versus individual instruments. This open textbook will have a collection of standalone topics grouped into four modules

Module 0. The Pension Landscape

Topic 1: Introduction
Topic 2: Gathering Stories & Other Activities

Module 1. Design

Topic 1: The World Bank’s Five Pillar Framework
Topic 2: Pensions as Intertemporal Choice
Topic 3: Social Contracts and Pension Design
Topic 4: The Pension Design Framework
Topic 5: The Constraints on Pension System

Module 2. Governance of Pensions

Topic 1: Governance of Pension Plans
Topic 2: Pension Governance – The Role of Learning
Topic 3: Modes of Learning
Topic 4: Enablers of Pension Governance

Module 3. Investments of Pension Assets Pension Assets

Topic 1: Pension Investments: An Overview
Topic 2: The Investment Policy Statement
more topics to follow….

This open textbook is visualized as an evolving and living resource that will reflect the latest thinking and innovations in the important field of old age financial planning.The organization of the eText into individual topics and modules supports the continuous evolution and  updating of the knowledge base on pensions.

How Will You Learn?

The overall pedagogy is influenced by Bonk & Zhang’s (2006, 2008) R2D2 model (see Figure 1), which involves students interacting with verbal and visual content, reflecting on those stimuli, displaying visual representations of the disciplinary elements (instructor and student led), and the ‘doing’ or practice exercises.

Figure 2. Bonk & Zhang’s (2006, 2008) R2D2 model.

Below are the suggested study steps according to this model:

1. Read (& Listen)

• Before class, read all assigned readings (article, website, video, podcast, etc.)
• Read all messages from your instructor and peers (announcement/emails, discussion forum posts), not just your own posts!
• In class, listen to instructor and peers  (be present)

2. Reflect (& Observe)

• Before, during, and after class, critically reflect on what you’ve read/heard
• Record your ideas, thoughts, feelings
• Differentiate your ideas from others’ ideas (problem clarification)
• Construct knowledge, deepen understanding

3. Display

• Be creative with representing your knowledge!
• In addition to traditional tables and charts created using Word, Excel, PowerPoint, etc., you can use concept maps, tables, charts, audio, video, info graphics, etc.
• Free software is available for concept mapping:
  Coggle  https://coggle.it/
  Bubbl.us https://bubbl.us/
  Cmap Cloud  https://cmapcloud.ihmc.us/
• Free software is available to create podcasts and video
  Audacity https://www.audacityteam.org/ 
  APowersoft https://www.apowersoft.com/free-online-screen-recorder
• Free software is available for info graphics
  Venngage  https://venngage.com/
  Easel.ly  https://www.easel.ly/

Doing (Applying)

• Hands-on, active learning
• Problem solution evaluation
• Knowledge transfer
• Contributor to the open textbook

Building, implementing and sustaining pensions is a work in progress, a challenge that needs to continuously responds to ongoing changes in the socioeconomic environment that current and future generations are inevitably faced with.  This work cannot be delegated to a few individuals and organizations.  All of us have a vested interest in sustainable and adequate pensions, and everyone must be encouraged to have the mindsets, skills and tools to pension plan now and in the future. This open access electronic textbook is designed to inform the learners’ thinking about pension design, governance and investment decisions to build a community or professional practice that can contribute to the long-term project of building sustainable and adequate pensions for all.

It can be used as a course resource, for communities of practices, and other self-organized learning groups involving citizens interested in contributing to building a pension system that will benefit the maximum number of citizens no matter their economic, political and social status. This open textbook platform will be eclectic, and a living resource will evolve to respond to new developments, data and information and emerging challenges.