Research On The Establishment, Performances And Administration Of Default Fund In Individual Account Pension Systems

Recently, many reforms in pension system have emphasized on individual responsibility. Almost30countries have introduced mandatory funded pension plans where individuals bear investment risk during the accumulation phase and can opt for different types of income streams at retirement. In countries where mandatory individual account systems are large, these financial decisions can determine their standard of living in old age. Individual investment options can be one of the most important reforms in pension systems. However, many employees failed to select an investment portfolio that matches their risk and return preferences, they preferred default fund which was designed as a supplemental part in pension systems.Almost20countries provide different default funds in pension systems. The different experiences around the world show that default fund is suitable for plan members. The participation rate has improved after policymakers change into auto-enrollment in401(K).The deferral rates and investment strategies also changed after members choose default funds.Why so many pension members failed to take active choice and prefer default fund? What is the advantage of default fund? How to design a suitable default fund for members? Although discussion about default fund in China is far beyond our country’s pension system, but providing investment options for plan members is still a main theme in the world. Those issues are really meaningful for policymaker.Many academics stated to interest in default fund when they were studying the empirical data of investigation on individual investment options. They found out that in many countries a large amount of plan members failed to take active choice, they chose default fund. A growing research literature in behavioral economics suggests that plan members has bounded ration, so that they have no knowledge or capacity to make active choice. OECD working paper summarized different default funds in OECD countries, and focus on investment strategies adopted by default funds. Recently, the regulation and administration of default fund has been discussed and presented in some journals.This paper describes the establishment, performance, administration of default fund in pension systems, and also designs a new policy for Chinese individual account.This dissertation consists of seven chapters:The first chapter will mainly introduce the background, implications, contents and innovation of research.The second part will provide a brief summary of the exiting literature on behavioral economics, performance, investment and administration of default funds.The third part will describe the theoretical basement and empirical date of behavioral economics. It will also give a detailed interpretation of how people make decisions and why default fund is suitable for plan members.In chapter4, we will classify and introduce different default funds in countries according to the different aims of default funds.Chapter5is the critical part of this paper. We will sum up the successful experience of the default funds, including1) aiming at plan members rather than the sponsers;2)imposing information disclosure and financial education;3)selecting a efficient investment strategy with the lengths of withdraw and tax incentives;4)adopting the passive administration and lowing the cost of default funds.In chapter6, we will design a new policy base on life cycle fund for individual account in Chinese pension system, and also will propose some macroscopic advices for our pension system.The final chapter will describe the weakness of dissertation and give advices on relative problems.The innovation of this dissertation is introducing a new concept into our pension system. There were hardly any discussions or researches about default funds in domestic academic. We also focus on the individual options right and the relationship between default funds and investment options. We aim to depict the whole aspects of default funds and plant the advanced experiences into our domestic pension system. Finally, we try to design a new policy to solve the trouble of individual accounts.The main weaknesses of this dissertation are as follows:First, default fund is not a precise definition. According OECD report, we consider some trust funds with certain deferral rate and investment options, the original investment strategies and auto enrollment in401(K) as default fund. However, this may be not accurate.Second, our research is far behind the practical of pension reform, so we must forecast the problem of the default fund may occur in the future, especially when a large sum of members enrollment into default funds.Last but not least, we cannot prove or adjust our assumed new policy in domestic pension system due the lake of data or empirical experience.