Vital source of reference
The Foundations of Pension Finance: volumes 1 and 2.
Edited by Z Bodie and E P Davis, Edward Elgar. Published 2000. ISBN 184064186X. 1,152 pages. £250
These two volumes bring together the classic papers in the field of pension financing. As the title intimates, these articles and essays are the analytical and conceptual foundations for understanding pension financing, investment and administration.
The overwhelming source of these volumes are academic articles rather than reports or industry commentaries. In sum, this publication should be welcomed by all academics and practitioners concerned to understand the evolution of our field of endeavour, recognising that contemporary practice owes its roots to arguments and debates that can be traced back almost 50 years. Most importantly, there is no better compilation of these important articles and papers; it is justifiably the single best reference source currently available.
These two volumes are organised in the following way. In the first instance, the editors provide an overview and introduction to the whole project. In doing so, they are concerned to establish the basic principles which they used to guide both the selection of the subsequent articles and papers and our understanding of their importance. So, for example, the editors deal with issues such as why pensions matter, the various public and private responsibilities for retirement savings, and the basic differences between defined benefit and defined contribution pension plans. Importantly, they also consider the advantages of funding pension obligations distinguishing between pay-as-you-go pension systems and the common Anglo-American practice of advance-funding of private pension promises. They refer to these arguments as their ‘conceptual framework’, situating debate about the funding of future retirement income firmly in contemporary practice.
In Part I of Volume I, the editors bring together a set of eight papers that establish theoretically and empirically the connection between pension financing and demography. This includes Samuelson’s classic paper as well as recent research done by the OECD on the implications of demographic ageing for the financing of pension obligations (Roseveare et al). In Part II of Volume I, the editors provide another nine papers dealing with the interaction between Anglo-American pension funds, the investment management industry, and related public policy. In this part, difficult-to-obtain papers are reproduced and important statements made about the role of institutional investors in driving the development of Anglo-American financial markets. Although I recognised all the authors included in this part of the two volumes set, I was able to read for the first time a number of papers. I was especially impressed by the editors’ own contributions to (respectively) understanding public policy and the role of institutional investors.
Turning to Volume II, this volume is organised into three parts. Part I deals with the role of pension and retirement income savings for individuals and the mix of public and private provision of retirement income. So, for example, Feldstein’s classic 1978 article on the question of whether private pensions increase national savings is reproduced as is Munnell and Yohn’s 1992 paper on the impact of pensions on savings. Most importantly, the editors seem to have managed the impossible: through their selection of papers they have been able to show the role of pensions in relation to household saving behaviour while recognising that individuals are increasingly responsible for the investment of pension and savings assets. In Part II of Volume II, the editors take us into the world of corporate finance and corporate pension policy. Another nine papers are devoted to this topic. Finally, in Part III of Volume II, the editors include a set of seven papers devoted to the question of pension reform across the world. Some of these papers come from the World Bank, one from the IMF, and a couple were unpublished.
The volumes should be welcomed on three further counts. Most obviously, these two volumes include papers and arguments that remain as relevant today as they were when first published. For example, there is much to be learnt about the issue of privatising social security by reference to a number of the papers included the two volumes. As well, given the arguable success of the Anglo-American model of pension and retirement income (compared to continental European models) these volumes provide vital source material in understanding the design and evolution of this kind of system. Notice, however, many of the papers originate in the US. Even so, what we must recognise that the contemporary debate is profoundly affected by scholars working from that perspective. It should also be recognised that questions of reform must inevitably refer back to many of the debates. So they are a vital reference source for contemporary policy-making as well as for financial institutions seeking to understand their possible place in the future.
Gordon L Clark is a professor at the University of Oxford and is affiliated with the Said Business School