GLOBAL - The World Bank’s three-pillar model for pension systems has been savaged in a study by Nobel Prize winner Franco Modigliani.

Modigliani and his co-author Arun Muralidhar make the attack in their book ‘Rethinking Pension Reform’.

Modigliani, who died last year, won the Nobel Prize in economic science in 1985 for his work on the functioning of financial markets and the behaviour of household savers.

Muralidhar is managing director of FX Concepts, a US-based currency management firm, and a former head of research and member of the investment committee at the World Bank.

Modigliani and Muralidhar concentrate their attack on mandatory defined contribution (DC) schemes like Italy’s. They say that systems set up on this basis favour asset managers at the expense of pension savers.

“Many countries have created, or are considering, multi-pillar systems that depart from the basic principles of social security,” they state.

“In many cases the reforms that emphasise a three-pillar system, with a funded mandatory DC relying on individual accounts as second-pillar anchor, will lead to an enormous waste of resources and run the risk of leaving individuals with poor balances in their individual accounts while enriching asset managers.”

They say that people should receive defined benefits and governments should offer DB social security systems. They propose a new two-pillar system in which the first is a mandatory DB scheme and the second is a voluntary DC scheme. The DB system may be either partially to fully funded.

They suggest governments can minimise the risk of DB schemes with variable contributions. Future government pension systems could enter into a swap with their treasuries to hedge against the variability of short-term asset returns and still offer defined benefits.

Muralidhar expects the proposals to meet strong opposition. “Given the polarity of the debate, we anticipate as much criticism as support of our position,” Muralidhar says.

‘Rethinking Pension Reform’ is published by Cambridge University Press, price £45, The ISBN number is 0521 834112.