Academic journal article Business: Theory and Practice

The Evaluation of the II Pillar Pension's Funds: An Integrated Approach Using Multi-Criteria Decision Methods

Academic journal article Business: Theory and Practice

The Evaluation of the II Pillar Pension's Funds: An Integrated Approach Using Multi-Criteria Decision Methods

Article excerpt


During the last decades have risen the wave of retirement pension systems' reforms based on demographic changes in the world. Some countries carried out the parametric reforms of pension systems, i.e. they made only partial changes of the system; meanwhile others has had fundamental changes of the structure of the system. Lithuania belongs to the second group of the changes: a three-pillar old-age pension system (which was suggested by World Bank in 1994) has been implemented since 2004. Nevertheless, when the global crisis happened, such changes caused only more debates about the efficiency of the system, its eligibility and benefits to participants. It should be noted that unlike many countries, the participation in the II pillar pension funds is not mandatory for Lithuania; however, if an individual choses to participate, the opportunity stopping the participation is not eligible anymore. Moreover, the majority of the workers chosen to participate in these funds and thus it imply the need to analyse and evaluate these funds, and the comparison of each other.

The analysis of literature shown that scientists analyse the indicators which assess pension funds (such as a change of the value of the unit, standard deviation, Sharpe ratio, Jensnen's alpha etc.), but they do not seek to unite them into a single whole (Bartkus 2007, Jasiene and Kociunaite 2007, Lieksnis 2010, Gudaitis 2010, Bohl et al. 2011, Huang and Mahieu 2012, Jureviciene and Samoskaite 2012, Kumar Gandhi and Perumal 2016 etc.). Multi-criteria decision methods (Pendaraki and Zopounidis 2003, Pendaraki et al. 2005, Lin et al. 2007, Alptekin 2009, Chang et al. 2010, Sielska 2010, Babalos et al. 2011, Stankeviciene and Gavrilova 2012, Stankeviciene and Bernataviciene 2012, Jureviciene and Bapkauskaite 2014, Alibakhshi and Moghadam 2016, Afful-Dadzie E. and Afful-Dadzie A. 2016, Duarte Junior and Barbosa Medeiros 2016 etc.) can help to systematize indicators.

Therefore the aim of this article is to analyse and assess II pillar pension funds in Lithuania using multi-criteria methods and to propose proper and advanced assessment model for pension funds. This article allows to evaluate and compare the II pillar pension funds, and also to adapt multi-criteria methods where various pension funds ratios are combined into a single one indicator. Different multi-criteria decision methods' results are combined into one indicator, and used to test funds' performance.

The paper is structured as follows: the first section analyses the problem of II pillar pension funds valuation, discusses the methods used for the funds assessment, also there are presented multi-criteria methods. The second section presents a comprehensive methodology of research, describe the process and structure of the empirical research. The third section represents the results of the research: estimate the performances of pension funds, present the consolidation of the results based on 6 different multi-criteria methods (SAW, SR, GA, TOPSIS, VIKOR, COPRAS) in two scenarios. Moreover, this paper proposes a framework that supports the proper valuation of pension funds. Finally, the fourth section discusses the conclusions and future work.

1. Literature review

Social security system reforms are an ongoing process around the world. After Lithuania has regained its independence the social insurance system was created based on fundamental principles: universality, solidarity, etc. Lithuanian social insurance system is based on PAYG basis for a long time. However, according to the offerings of the World Bank and good practices of Latin America's countries (e.g. Chilean case), the old-age pension of state social insurance contributions has been validated in Lithuania since 2004. This gives the basis for accumulative pension insurance. Since 2004 a new pension scheme started to run in Lithuania where every person (who has not reached the retirement age, and is insured for the basic and supplementary parts of the pension) may have an option to sign a contract with pension's funds management company (that how the part of the contributions of state social pension insurance started to accumulate in II pillar pension funds). …

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