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Study sees notional DC taking off in Europe

EUROPE – A new academic study says the so-called notional defined contribution model could become “much more widespread” in the European Union.

The study found the NDC model – which emerged in the mid-1990s and is based on the concept of notional accounts - “could well become much more widespread than it is today among nations in the European Union”.

“NDC schemes may be adopted by many countries in part as a way to address practical social policy problems,” said John Williamson and Matthew Williams in a 59-page study published by the Center for Retirement Research at Boston College.

“While it is not yet clear how many nations in the European Union will adopt the NDC model, it is possible that eventually many will,” they write.

“One reason is that it offers a way to help deal with the problem of financing the retirement of the baby boom generation, an issue that most of these nations will soon be facing.”

The researchers say that another reason for possible adoption of the NDC model by EU countries “is that it would make it easier to provide adequate pension coverage for workers who move from country to country as their jobs change or are relocated”.

They argue that the NDC model offers alternatives to traditional pay-as-you-go defined benefit schemes for dealing with pension credit from several countries.

The study draws on evidence of NDC schemes from six countries: Sweden, Italy, Poland, Latvia, the Kyrgyz Republic and Mongolia. It argues that: “In the years ahead it may be combined with or possibly displace the funded defined contribution model as the major alternative to the PAYGO DB model.”

They authors say it makes a more explicit link between contributions and eventual pension benefits – although they acknowledge that it provides less adequate pension benefits to low-wage workers.

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