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- 9 / Reforming the German Civil Servant Pension Plan 139
- 140 Raimond Maurer, Olivia S. Mitchell, and Ralph Rogalla
- 9 / Reforming the German Civil Servant Pension Plan 141
- 142 Raimond Maurer, Olivia S. Mitchell, and Ralph Rogalla
- The Outlook for Canada’s Public Sector Employee Pensions
- 144 Silvana Pozzebon Relative importance of public and private sector plans
- 10 / The Outlook for Canada’s Public Sector Employee Pensions 145
- 146 Silvana Pozzebon
To be precise, the beneﬁts of retired civil servants are adjusted according to the
general salary increase of active civil servants.
Civil servants are exempt from unemployment insurance and the state covers
a certain fraction of health care expenses for civil servants and their families.
These fractions range from 50—85 percent, depending on family status, number
of children, and state (Börsch-Supan and Wilke 2003).
If, for example, a civil servant were to quit service and take a job in the private
sector, he would sacriﬁce about 50 percent of his accrued pension claims. In
this case, the state pays the employee’s foregone employer contributions to the
national social security system.
9 / Reforming the German Civil Servant Pension Plan 139
To compensate for this cut in pension beneﬁts, civil servants are allowed to
(voluntarily) invest up to 4 percent of their salary (with a ceiling of C2,100
per year) into tax sponsored personal retirement account also known as ‘Riester
accounts’; see Maurer and Schlag (2003).
Being part of former West Germany, Hesse’s civil service population appears
to be rather representative of the approximately 1.5 million active (which is
about 4.5 percent of the German workforce) and 900,000 retired civil servants in
Germany as a whole; this section draws on Maurer, Mitchell, and Rogalla (2008).
This time horizon could be easily extended, but after 50 years, all active workers
will be fully included in the new funded system.
See Blake (2006), Gold (2003), and Waring (2008).
The difference between the average nominal par yield of long term German gov-
ernment bonds and the average inﬂation rate for the post-World War II period
is about 4 percent. Inﬂation protected bonds in the Eurozone currently yield
about 2 percent. This market is currently not well developed for government
bonds (especially those with long durations) which supports the assumption of a
real interest rate of 3 percent.
As noted above, we set aside pension beneﬁts of current retirees as well as those
already accumulated by currently active civil servants and assume that these will
be covered by some other ﬁnancing arrangement. Thus, only future beneﬁt
accruals by active civil servants will be covered by this scheme.
We assume investments in index funds to prevent the state from systematically
inﬂuencing asset prices.
For a comparable objective function using the Value at Risk see Albrecht et al.
We deliberately do not dynamically optimize investment weights and contribu-
tion rates over time. While this might by appealing from a theoretical perspec-
tive, political decision makers will most likely be unable to implement this in
practice. Moreover, empirical evidence on pension plan asset allocation suggests
that investment weights are rather constant in real-world pension schemes (see
Haberman et al. ).
For a detailed discussion of the advantages of the CVaR over the more widely
acknowledged VaR see, for example, Artzner et al. (1997, 1999) and Rockafellar
and Uryasev (2002).
The state variables included here are commonly used in the strategic asset allo-
cation literature (see e.g., Campbell and Shiller [1988, 1991]; Fama and French
; Campbell, Chan, and Viceira ; Campbell and Viceira ;
Cochrane ; Brandt and Santa-Clara ).
For an extensive discussion of design and characteristics of real estate indices
we refer to—among others—Hoesli and MacGregor (2000) and Albrecht and
In a survey by Eichholtz (1997), correlations between common equities and
property company shares range from 0.12 to 0.96.
Other methods to unsmooth real estate return time series have been suggested
by—among others—Firstenberg, Ross, and Zisler (1988), Ross and Zisler (1991),
Geltner (1993), Fisher, Geltner, and Webb (1994), and Barkham and Geltner
140 Raimond Maurer, Olivia S. Mitchell, and Ralph Rogalla
A thorough analysis of the institutional design of German open-end real estate
funds, as well as their risk and return proﬁle can be found in Maurer, Reiner, and
Mean real log returns on bonds in our time series come to almost 5 percent
per year while equities only yield an excess return of 1.5 percent. We reduce
expected bond returns to 4 percent, considering this to be more appropriate in
the long term.
Formally, we expand the total pension cost in Formula 2 to T P C = ”(RC
+ (1 +
− (1 − Ó
), where W
are the withdrawals in the case of a funding
ratio higher than 180 percent and Ó
is the penalty factor.
ABP (2006). ABP Annual Report 2006. Heerlen, The Netherlands: ABP Investments.
ABP (2007). Strategic investment plan ABP 2007–2009. Heerlen, The Netherlands:
Albrecht, Peter and Raimond Maurer (2005). Investment- und Risikomanagement, 2nd
ed. Stuttgart, Germany: Schäffer-Poeschel.
Joachim Coche, Raimond Maurer, and Ralph Rogalla (2006). ‘Understanding
and Allocating Investment Risks in a Hybrid Pension Plan,’ in D. Blitzstein, O. S.
Mitchell, and S. P. Utkus, eds., Restructuring Retirement Risks. Oxford: Oxford
University Press, pp. 204–25.
Artzner, Philippe, Freddy Delbaen, Jean-Marc Eber, and David Heath (1997).
‘Thinking Coherently,’ Risk, 10(11): 68–72.
(1999). ‘Coherent Measures of Risk,’ Mathematical Finance,
Barkham, Richard and David M. Geltner (1994). ‘Unsmoothing British Valuation-
based Returns without Assuming an Efﬁcient Market,’ Journal of Property Research,
Blake, David (2006). Pension Finance. Chichester: Wiley.
Blundell, Gerald F. and Charles W. Ward (1987). ‘Property Portfolio Allocation: A
Multi-factor Model,’ Land Development Studies, 4: 145–56.
Börsch-Supan, Axel and Christina B. Wilke (2003). ‘The German Public Pension
System: How it Was, How it Will Be.’ MRRC Working Paper 2003–41. Ann Arbor,
MI: Michigan Retirement Research Center.
Brandt, Michael W. and Pedro Santa-Clara (2006). ‘Dynamic Portfolio Selection by
Augmenting the Asset Space,’ Journal of Finance, 61(5): 2187–2217.
Campbell, John Y. and Robert J. Shiller (1988). ‘Stock Prices, Earnings and
Expected Dividends,’ Journal of Finance, 43: 661–76.
(1991). ‘Yield Spreads and Interest Rate Movements: A Bird’s Eye View,’
Review of Economic Studies, 58: 495–514.
and Luis M. Viceira (2002). Strategic Asset Allocation: Portfolio Choice for Long-
Term Investors. Oxford: Oxford University Press.
(2005). ‘The Term Structure of the Risk-Return-Trade-off,’ Financial
Analysts Journal, 61: 34–44.
9 / Reforming the German Civil Servant Pension Plan 141
Yeung L. Chan, and Luis M. Viceira (2003). ‘A Multivariate Model for Strategic
Asset Allocation,’ Journal of Financial Economics, 67: 41–80.
Cochrane, John H. (2005). Asset Pricing. Princeton: Princeton University Press.
Craft, Timothy M. (2001). ‘The Role of Private and Public Real Estate in Pension
Plan Portfolio Allocation Choices,’ Journal of Real Estate Portfolio Management,
DAV (2004). Herleitung der DAV-Sterbetafel 2004, R für Rentenversicherungen. Köln:
Eichholtz, Piet M. (1997). ‘Real Estate Securities and Common Stocks: A First
International Look,’ Real Estate Finance, 14(1): 70–74.
Fama, Eugene F. and Kenneth R. French (1989). ‘Business Conditions and the
Expected Returns on Stocks and Bonds,’ Journal of Financial Economics, 25:
Firstenberg, Paul M., Stephen A. Ross, and Randall C. Zisler (1988). ‘Real Estate:
The Whole Story,’ Journal of Portfolio Management, 14: 22–34.
Fisher, Jeffrey D., David M. Geltner, and R. Brian Webb (1994). ‘Value Indices of
Commercial Real Estate: A Comparison of Index Construction Methods,’ Journal
of Real Estate Finance and Economics, 9(2): 137–64.
Geltner, David M. (1993). ‘Estimating Market Values from Appraised Values without
Assuming an Efﬁcient Market,’ Journal of Real Estate Research, 8(3): 325–45.
Gillis, John R. (1968). ‘Aristocracy and Bureaucracy in Nineteenth-Century Prussia,’
Past and Present, 41(December): 105–29.
Gold, Jeremy (2003). ‘Risk Transfer in Public Pension Plans,’ in O.S. Mitchell and
K. Smetters, eds., The Pension Challenge: Risk Transfers and Retirement Income Security.
Oxford: Oxford University Press, pp. 102–15.
Haberman, Steven, Christopher Day, David Fogarty, M. Zaki Khorasanee, Martin
McWhirter, Nichola Nash, Bernard Ngwira, I. Douglas Wright, and Yakoub
Yakoubov (2003). ‘A Stochastic Approach to Risk Management and Decision
Making in Deﬁned Beneﬁt Pension Schemes ,’ British Actuarial Journal, 9(3):
Heubeck, Klaus and Bert Rürup (2000). Finanzierung der Altersversorgung des
öffentlichen Dienstes. Frankfurt: Peter Lang Verlag.
Hoesli, Martin and Bryan D. MacGregor (2000). Property Investment: Principles and
Practice of Portfolio Management. Harlow, England: Pearson.
Hoevenaars, Roy P., Roderick D. Molenaar, and Tom B. Steenkamp (2003). ‘Sim-
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London: Risk Books.
Peter C. Schotman, and Tom B. Steenkamp (2008). ‘Strategic Asset
Allocation with Liabilities: Beyond Stocks and Bonds,’ Journal of Economic Dynamics
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Hustead, Edwin C. and Olivia S. Mitchell (2001). ‘Public Sector Pension Plans,’ in
O.S. Mitchell and E.C. Hustead, eds., Pensions in the Public Sector. Philadelphia, PA:
University of Pennsylvania Press, pp. 3–10.
Maurer, Raimond and Christian Schlag (2003). ‘Money-Back Guarantees in Indi-
vidual Pension Accounts: Evidence from the German Pension Reform,’ in O.S.
Mitchell and K. Smetters, eds., The Pension Challenge: Risk Transfers and Retirement
Income Security. Oxford: Oxford University Press, pp. 187–213.
142 Raimond Maurer, Olivia S. Mitchell, and Ralph Rogalla
Maurer, Raimond, Frank Reiner, and Steffen Sebastian (2003). ‘Financial Charac-
teristics of International Real Estate Returns: Evidence from the UK, US, and
Germany,’ Journal of Real Estate Portfolio Management, 10(1): 59–76.
and Ralph Rogalla (2004). ‘Return and Risk of German Open-end Real
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Olivia S. Mitchell, and Ralph Rogalla (2008). ‘The Victory of Hope over Angst?
Funding, Asset Allocation, and Risk Taking in German Public Sector Pension
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Cheltenham, UK: Edward Elgar, pp. 51–79.
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(2005). Fundamentals of Private Pensions, 9th ed. Oxford: Oxford University
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Mixed-Asset Portfolio Performance,’ Journal of Real Estate Portfolio Management,
The Outlook for Canada’s Public Sector
Occupational pension plans are a key component of Canada’s retirement
income system. Assets held by occupational pensions or registered pension
plans accounted for 60 percent of the total CAN$1.9 trillion of assets
amassed in the country’s retirement programs in 2006.
sion plans of public sector employees in turn play an important role in the
Canadian retirement regime. With almost two-ﬁfths of Canada’s retirement
assets held by public sector pension funds, the latter represented the largest
share of the country’s pension assets in 2006 (Statistics Canada 2008).
The nine largest Canadian pension funds were also associated with the
public sector, accounting for 46 percent of the total market value assets
of CAN$693.1 billion accumulated in Canada’s 100 top pension funds (in
In terms of employment, the public sector corresponded to 21 percent of
the Canadian paid labor force in 2006.
This sector includes civil servants
and employees of government enterprises at various levels (federal, provin-
cial, territorial, and local), as well as provincial and territorial employees of
publicly-funded educational, health, and social service institutions.
The turbulent employment and market environments of recent years
have spurred considerable interest in occupational pensions in Canada
among practitioners, policymakers, and a few researchers. One area that
remains largely unexplored concerns public sector employee pension
plans, the subject of this chapter. In what follows, we ﬁrst examine the
relative importance of public and private sector employee pension plans
in Canada and review their general characteristics drawing largely from
administrative data collected by Statistics Canada (various years) through
the Pension Plans in Canada Survey. We then turn to a discussion of funding
issues and other challenges faced by public sector plans.
144 Silvana Pozzebon
Relative importance of public and private
Registered pension plans (RPPs) are the most common type of occupa-
tional pension arrangement in Canada.
For reasons of simplicity, RRPs
will be referred to as either occupational pension plans or employer-
sponsored pension plans in what follows. Voluntarily-sponsored by employ-
ers or unions, RPPs must comply with federal income tax law to obtain
favorable tax treatment for both employer and employee contributions
within stipulated limits, as well as for investment earnings. RPPs are also
subject to minimum standards prescribed by federal and provincial pen-
sion regulations. Some public sector employee groups (e.g., civil servants,
teachers, and members of legislative assemblies) are covered by special pen-
sion statutes. These employee groups under special statutes differ among
jurisdictions and in some instances, there is a degree of complementarity
between special statutes and the general pension legislation applicable in
As Table 10-1 shows, a number of parallels can be drawn between the reg-
istered pension plan membership distribution of public and private sector
employees. The 5.8 million Canadian RPP participants at the beginning of
2007 were almost evenly divided between the public and the private sectors.
Moreover, the share of pension plan membership as a percentage of the
country’s paid workers was also similar in the two sectors (18% for the
public sector versus 20% for the private sector). Differences in member-
ship distribution between the sectors exceed similarities however. Public
sector plan membership appears to be heavily concentrated (Table 10-1),
with three-ﬁfths of public sector RPP members employed by provincial
government bodies or enterprises at the beginning of 2007. Analysis of
additional data not reported in Table 10-1 indicates that the vast majority
of public sector RPP members were found in two industrial classiﬁcations:
67 percent in public administration and 26 percent in educational services,
health care, and social assistance.
By contrast, private sector plan members
work in a wider range of industries with the largest proportions being in
manufacturing (25%), followed by trades (18%), construction (13%), and
Membership gender patterns between the public and private sectors
also diverge, as shown in Table 10-1. Sixty percent of public sector plan
participants were female with proportions reversed in the private sector
where 62 percent of members were male. These numbers do not reveal
the fact that females represent a steadily growing share of plan members
in both sectors over time. The proportion of females in the public sector
increased from 37 percent in 1974 to 60 percent in 2007, while in the
private sector, the proportion almost doubled from 20 to 38 percent during
10 / The Outlook for Canada’s Public Sector Employee Pensions 145
Table 10-1 Overview of public and private sector Registered Pension
Plans (RPPs), Canada, 2007 (at January 1)
Active members in RPPs (total: 5.8 million)
Number of RPPs (total: 18,594)
Male members in RPPs (total: 3.0 million)
Plan assets as % of reserves held in all RPPs
(total: 1.1 trillion CAN$, market value)
Members in sector:
Members as % of Canadian paid labor force
Members as % of paid labor force in sector
Sub-sector of employment
Sources: Author’s calculations based on Statistics Canada (n.d. Table 183-0002,
n.d. Table 280-0009, n.d. Table 280-0010, n.d. Table 280-0012, n.d. Proportion of
Labour Force and Paid Workers Covered by a Registered Pension Plan [RPP]).
the same period.
Among the explanations cited for this trend are the
growth in female labor force participation, and employment shifts away
from male-dominated areas such as heavy industry and manufacturing to
female-dominated service industries (Schembari 2006).
The table also reveals that, compared to the private sector, most public
sector plan members were concentrated in large plans. Almost three-
quarters of the public sector members were in plans of 30,000 or more,
whereas more than two-thirds of private sector members were in plans of
10,000 or fewer. These ﬁgures are consistent with the fact that plans in the
public sector represented only 7 percent of the 18,594 RPPs in Canada at
the beginning of 2007.
Perhaps the most telling distinctions between the public and private
sectors emerge from a study of RPP coverage rates. At the end of 2006,
total RPP participants in Canada represented 38.1 percent of paid workers.
The RPP coverage rate fell from 44.7 percent in 1981 to 38.1 percent in
2006, with a consistent downward trend discernable since the early 1990s
146 Silvana Pozzebon
(see Figure 10-1). The decrease in overall RPP coverage rates in Canada
has been driven by developments in the private sector. The proportion
of private sector paid workers who were members of employer-sponsored
pension plans has eroded slowly since 1991 from percentages in the mid- to
low-thirties during the 1980s to 25 percent at the end of 2006. By compari-
son, the share of public sector paid workers in RPPs experienced a one-time
jump from 76 percent in 1989 to 84 percent in 1991, rose slowly until 1999
and has been relatively stable since. As such, the 86 percent coverage rate
at the end of 2006 for the public sector stands in sharp opposition to the
situation in the private sector where only a quarter of the paid labor force
is covered by an occupational pension.
Several explanations have been offered for the decline of private
sector pension coverage in Canada. Among these are the structural
shifts in employment as mentioned earlier, complex legal requirements
which added to pension administrative costs, and an uncertain economic
environment increasing the ﬁnancial burden of pensions for employers.
Differences in unionization rates between the private and public sectors
may also be telling since unions have traditionally sought to secure pensions
Total RPP members
Figure 10-1 Percentage of paid workers covered by a Registered Pension Plan
(RPP), total and by sector, Canada: 1981–2006. Sources: Total percentages: 1981–
2003 data from Statistics Canada (2006b ); 2005 data from Statistics Canada (2007a);
2006 data from Statistics Canada (n.d. Proportion of labour force and paid workers
covered by a registered pension plan). Sector percentages: Author’s calculations
using: sources cited for total percentages; Statistics Canada (n.d. Table 183-0002,
n.d. Table 280-0009); Statistics Canada (2006a).
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