Trust in the financial performance of pension funds, public perception, and its effect on participation in voluntary pension saving plans

We investigate the determinants of trust in one’s pension fund and the effect of trust on the decision to ensure additional pension savings. Our analysis is based on exogenous shocks arising from pension cuts and indexation, and on how these are perceived. These instruments allow identifying the effect of trust in pension funds on participation in voluntary pension saving plans. We disentangle the effects of age, birth cohort, and time in the determination of trust, and counter previous findings of a positive age gradient with trust. This implies that in the future the general level of trust in pension funds will decline. This study also finds a positive effect of trust on additional pension savings. Hence, the positive correlation found in previous studies can be interpreted as causal. Lastly, we contribute to the current debate on self-employment and retirement preparation. Our findings suggest that the decision to become self-employed and to arrange one’s own pension savings is likely not driven by the desire to exit the occupational pension system, as those who make additional pension savings arrangements — including self-employed workers — in fact trust their pension fund.

Keywords: Trust; additional pension savings; cohort-time effect; self-employment
JEL codes G51; J32

Working paper no. 783