By Bhanu Laur

Management of pension schemes has always been a difficult task for governments and the challenges that governments are facing today are growing faster than many countries anticipated. Pension plans have evolved overtime as public and private sector schemes slowly switching to PAYG system of funding and the uncertainty over current contributors’ future is growing. However, the recent financial crisis turned attention towards this hidden deficit of the countries where pension funds around the world lost significant amount of their value and the mounting pressure forced the policy makers to take actions to address this issue which they did by suspending and scaling down pension privatisation which once was proposed by World Bank and supported by countries around the world specially in Eastern Europe to answer the funding problems of pension plans.

Recent studies such as Drahokoupil and Domonkos (2013) and Orenstein (2014) among others have analysed the impact of financial crisis on pension funds and the role played by private pensions during that period but were unable to find any significant differences between public and private pensions in terms of returns and risks. These studies raise questions on the rationale behind the recent reforms that not only significantly reduced the funding through private pension plans but the initiatives such as UK government allowing pensioners to take their pension savings as single cash payment instead of buying annuity does not seem like a insightful step that can minimize the pension deficit but will result in extra cash burden on treasury (Flood, 2014).

Many European countries such as Hungary, Latvia and Poland completely abolished private pensions as a response to resolve the problem of pension deficit. However, on comparing the portfolios of public and private pensions during the period of financial crash, analysts found that both were holding risky assets and due to the market turmoil, the fund lost their value but question of why only private pension funds were penalized is still far from answered that can make economic and financial reasoning.

Source: SSRN