Notional Defined Contribution Accounts (NDCs): Solvency and Risk; Application to the Case of Spain

The aim of this work is twofold, on the one hand, to demonstrate the actuarial imbalance of the Spanish pension system in its current configuration, and on the other, to measure the aggregate economic risk to which the pensioner would be exposed if it were decided to apply ten formulas for the calculation of the retirement pension based on notional accounts. Given the uncertainty involved in working with a long term horizon, a model of generation of multi-periodic scenarios is used, based on the predictions of mean values of Alonso and Herce (2003) for the period 2006-2050. This provides up to ten thousand trajectories of the macroeconomic indices needed to calculate such parameters as the initial pension, the replacement rate (RR) or the internal rate of return (IRR), and the value-at-risk (VaR) of the pensioner. The results obtained are analyzed in both objective and subjective terms. The main conclusions are that, applying the notional philosophy, the expected average RR and IRR would be much lower than those obtained under the current rules of the pay-as-you-go system. If the projections used were slightly probable, the pension system would build up such a large additional financial imbalance in the future that it would require either a considerable reduction in the initial pension or a severe combination of parameter adjustments. From the risk perspective, the preferred formulas for a beneficiary most averse would be those based on future variations in salaries with a pension constant in real terms, whereas those beneficiaries less averse to risk would prefer formulas supplying a lower initial pension which grows in real terms in line with future variations in salaries.