Are Defined Contribution Pension Schemes Socially Sustainable? A Conceptual Map from a Macroprudential Perspective

If the combined retirement income, provided by public and private defined contribution (DC)pension schemes, falls below socially acceptable standards, there is a political risk thatconsensus seeker policymakers could yield to pressures to commit future fiscal revenues.These contingent liabilities, when incorporated in markets’ expectations, are bound to createspillovers on sovereign risk, with negative feedback loops on the capital adequacy of banksand of other intermediaries, owing to losses on their government paper. Among the causes ofreduced annuities out of the final assets in DC pension funds is an equity risk premium muchlower than the commonly values advertised by the industry and by policymakers. From amacroprudential perspective, this political risk should be taken into account in stress testsassessing banks’ resilience to financial shocks.