Mission

The UBS Pensions Research Programme at the LSE will pursue world class research on pension finance and policy, disseminate research-based intelligence to public and private stakeholders and provide a platform for knowledge exchange between the business, policy and academic communities.

The Programme will build on ongoing research at the LSE. The objective of the partnership with UBS is to enable the LSE to draw these resources together, to dedicate significant and intensive research capacity, to pursue knowledge exchange activities and to give visibility to research output. As such the Programme is interdisciplinary and interdepartmental in nature and will draw on the School's breadth of relevant expertise. An important outcome will be the provision of evidence-based intelligence and policy support to both public and private sectors.

Objectives

Provision of adequate security for old age is a central challenge facing most economies. Many countries, at all levels of economic development, have historically adopted a predominantly state-funded approach. However, there is increasing recognition that the traditional solutions need rethinking.

Two main forces underlie the dynamics of old-age provision. On the one hand, the development of capital markets has provided investment opportunities for the masses. On the other, there is a growing realisation that most state pension systems will require major adjustments in the future to sustain their promised commitments.

The uneven development of private pension finance across the states of Europe is striking as is the fact that a large number of states appear to be promising retirement incomes which will require major adjustments to finance. The absence of private finance reflects both the generosity of state provision and the absence, in many cases, of a suitable regulatory structure. This is bound to change. The development of the Euro zone will also play its part in spurring the development of a pan-European pensions market.

In recognition of the significance of these developments, the LSE has collaborated with UBS Global Asset Management to create the UBS Pensions Research Programme. Professor Timothy Besley, Chairman of the Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD), and Professor David Webb, Director of the Financial Markets Group, are the joint Directors of the Programme.

The Research Programme

The Research Programme has three main themes:

• Pension fund management
• Studies of household behaviour and demographic trends
• Public policies towards pensions

The Programme will take a pan-European perspective on the problems of ageing and pensions provision, and also undertake some comparative analysis with the US. The programme will be concerned with the three pillars of pension systems:

• a publicly funded system that provides a level of basic support for most of the population;
• a system of supplementary retirement schemes provided either though the state or through occupational schemes; and
• the full range of individual savings schemes and top-up occupational schemes.

The Programme will undertake research on a wide range of issues relating to pension systems and modes of funding across these three main pillars of old-age provision. A core concern will be research into pan-European pension fund management and the financial and socio-economic implications of private retirement planning.

Pension fund management and markets

Issues to be addressed in this context will include the challenges facing Defined Benefit schemes, the performance and structure of Defined Contribution schemes and an analysis of associated governance processes. There will also be a focus on performance measurement and risk/reward aspects of pension fund management.

Household behaviour and demographics

A second emphasis will be on individual and household behaviour and the underlying demographics of old-age provision, including the effects of different types of saving behaviour across Europe.

Public policy evaluation and the implications of transition for capital markets

Europe is characterised by high private savings and the private investment markets are already highly developed. Consequently, the future of the third pillar is likely to be one of evolution rather than very rapid change. The major changes in the future are likely to involve the first and second pillars.

Broadly speaking, demographic and labour market trends combine to make it likely that the first pillar needs to be reduced in importance relative to the second. This transition raises hard questions of intergenerational equity created by even a partial move from PAYG (Pay As You Go) to funded systems. Furthermore, it poses significant risks that can fall disproportionately on certain age and social groups unless effective institutional means for risk sharing are put into place.

These difficulties in moving toward funded pensions are justified by potential efficiency gains. However, any such gains will be passed on to beneficiaries only if adequate institutions can assure that market based pensions do not involve excessive administrative and trading costs. Our project will address a variety of questions concerning this transition.

It will be apparent that these will touch on some issues that traditionally have been the province of public finance specialists. Others fall within the sphere of finance. To deal comprehensively with the issues, then, we need to integrate the two approaches into the same project. This has rarely been done in the past - if ever.

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