Who Knows What About Their Pensions? Financial Literacy in the Chilean Individual Account System

This paper examines the question of what affiliates of the Chilean pension system know about their pension system, and whether they respond to incentives to learn more about their benefits depending on whether they stand to gain most from a particular aspect of the pension system. We rely on the 2004 Social Protection Survey (Encuesta de Prevision Social, EPS) to assess individuals’ financial literacy regarding several structural questions about their pension system. These questions are aggregated into several clusters, representing aspects of the pension life cycle, and literacy along these vectors of knowledge is assessed using an integer scoring system. Using multivariate regression, we show the older, healthier, more educated, married male workers know more about the system. Also, union members, those with higher incomes, and workers at larger companies are also more financially informed. We also find that knowledge varies by subject area; accordingly, it is important to ascertain what literacy shortfalls must be targeted before determining what education efforts might be useful. We also conclude that people become more pension literate, as that knowledge becomes more useful

Executive Incentives and Corporate Decisions: The Risk Management Channel

This paper provides evidence that insurance executives respond to their compensation incentives by adjusting observable risk-management policy variables – the reinsurance purchase decision, type of business conducted, and firm leverage. Executive incentives are modeled by the executive sensitivity of wealth to stock price (Delta) and stock volatility (Vega). Firms respond to increased executive incentives to bear risk by purchasing less reinsurance, but also conducting less business in long-tailed lines – a change which rewards the executive through increased market volatility. The cost of altering executive incentives to effect firm policy is much less than a similar change in firm structural variables