Intergenerational cross-subsidies in UK collective defined contribution funds

PurposeThe purpose of this paper is to evaluate the relative risks and benefits associated with defined contribution (DC) and defined benefit (DB) pension schemes. New regulatory and governance requirements and demographic changes have all significantly raised the costs and reduced the expected benefits to employers of operating DB schemes. In response, many employers have either closed down their DB schemes, closed the scheme to new members and/or to capped any further accruing of benefits for existing members. This decline in DB schemes and their replacement by less generous DC schemes, has been overwhelmingly seen by employees, the general public and Government as an unwelcome development that shifts significant pension risks from the employer onto the employee.Design/methodology/approachThe paper evaluates claims that DB schemes are less risky than DC schemes and, whether their passing ought to be such a cause of concern.FindingsThe paper finds that DC schemes are not inherently riskier than DB schemes. Indeed, it is argued that the low operational, governance and regulatory costs and flexibility of DC schemes provide employers and employees with the most cost‐effective means of saving for a pension. In contrast, despite the appearance that the employer rather than the employee is the primary risk bearer in respect of DB schemes, it is shown that this is largely a fallacy. Such an arrangement merely substitutes an employer's covenant for some portion of an independent (of the employer) investment portfolio. This reliance upon an employer's promises to continue to support and fund the pension scheme imposes a raft of additional firm‐specific (i.e. non‐diversifiable) risks and regulatory and governance costs upon the members of both DB and DC schemes.Originality/valueThe paper provides a topical and useful review of the risks, costs and benefits of DC and DB pension schemes in the UK.

This chapter goes into greater depth on a range of topics. Two fundamental questions relate to why employers choose to offer pension schemes and why they have switched to offer defined contribution (DC), rather than defined benefit (DB), schemes. After considering these two questions, this chapter analyses the problems with DC schemes, which this switch to the widespread use of these schemes will amplify. Next this chapter looks at ways the sponsors of DB schemes can shed responsibility for their DB schemes, and ways they can deal with rising longevity. This is followed by details of national insurance schemes to protect the members of DB schemes in the event of sponsor default. As well as DB and DC schemes, many other pension scheme designs are possible, and some of the alternatives are presented. This leads on to a consideration of the widespread use of uniform contribution and accrual rates, and the redistributive effects of pension schemes. Economies of scale are an important feature of pension schemes, and after analysing their nature there is a description of the pension system in a major emerging economy – China.

There are three main types of pension ‐ state pensions, employment pensions, and private pensions. Employment pensions are usually either defined benefit or defined contribution schemes. Pensions are a form of remuneration and can be used to attract, retain and motivate employees. Defined benefit schemes can also be used to encourage employees to retire and to attract higher quality employees. In addition, defined benefit schemes allow the employer to effectively bond the workforce not to take industrial action.

Defined Contribution Pension Risk and Mergers and Acquisitions: Evidence from United Kingdom

How people evaluate defined contribution, annuity-based pension arrangements: A behavioral exploration

Back to the Future: A Long Term Solution to the Occupational Pensions Crisis

Many factors play a part when comparing different pension schemes. Myths and misperceptions cloud the discussion whether employers or employees are better off with a defined benefit (DB), defined contribution (DC) or a hybrid scheme. We notice that, especially among proponents of DB schemes, some persistent misconceptions about DC schemes persist. In this article, we aim to clear up five of these myths: (i) DC schemes generate lower pensions than DB schemes, (ii) Individuals in DC schemes take poor investment decisions, (iii) Management fees in DC schemes are too high, (iv) Collectivity is lost in DC schemes, (v) Participants in DC schemes run big interest rate risks. DC pension schemes might not be a panacea to all retirement problems, but we feel a fair comparison with DB pension schemes is required.

Research on Financial Reporting by Defined Benefit Schemes

Based for the most part on the inadequacies of the defined benefit scheme (DBS) more because of the DBS‟ financial unsustainability and lack of capacity to enhance and entrench economic growth, Babatunde Alayande‟s article analyzes the behavior of both the DBS and the contributory pension scheme (CPS) in the context of the Nigerian economy, and the country‟s strong desire for funds and investments towards development. The article emphasized the influence offunded pension (as a savings stock) in spurring financial growth and enhancing development project financing. In sum, pension reform is identified as crucial because of its economic effects considering the link between contributions and benefits, pension funds contribution to financial markets development, and the efficiency of the public finance system.

The pension plan in Nigeria was first established by the 1951 Ordinance, a legislation of the colonial government aimed at providing pension for public servants at their retirement. The instrumentality of pension as an instrument of providing for workers during old age or other debilitating circumstances that leads to reduced or absence of financial supply has continued from then till date, but with various modifications and reforms. The previous pension plans were of the defined benefit (DB) scheme, that is, they were entirely funded by the government through yearly budgeting. But, they soon became unfunded due to the competition of numerous programmes and projects of the government at all levels, coupled with endemic corruption in the system. The effects of these were the delayed and the non-payment of pension benefits to the retirees, especially those of the public sector; many of whom got frustrated and died. The private sector at that time did not fare better, as most of them did not make any provision for pension plans, except some who paid certain amount as severance pay. This article examines the Nigeria's new contributory pension scheme enacted by the 2004 Pension Act, with the view of identifying its associated challenges and prospects. The most recent Pension Act 2014 was also examined. However, it was found out that the contributory pension scheme was more advantageous than the non-contributory pension scheme, otherwise referred to as the DB scheme, although, with certain recommendations given on the optimal utility of the new scheme.

Chapter 21 - Pensions

This chapter gives an overview of the developments regarding pensions in the Netherlands. It focuses on supplementary pensions, although the statutory social security pension in the first pillar is also briefly mentioned: this chapter looks both back and to the future. The sustainability of the pension system in the Netherlands is a major point of discussion in this chapter. Low market interest rates affect the financial sustainability of the capital covered by defined benefit schemes. The Dutch government has made a proposal for the Future of Pensions Act. This proposal endeavours to have all pension schemes adjust to the Future of Pension Act requirements no later than 1 January 2026 and then become defined contribution schemes. This proposal has raised much discussion.

In countries with large scale private and public funded pension arrangements, for example, the United States, Canada, Japan, the Netherlands, and the United Kingdom, one of the key decisions is how the contributions into the fund should be invested to best effect. The investment decision typically results in some form of risk sharing between members and sponsor in terms of (1) the level of contributions required to pay for all promised benefits, (2) the volatility of contributions required, and (3) the uncertainty of the level of benefits actually deliverable should the scheme be wound up or have to be wound up. Some of the risks associated with the pension benefits have a clear link with the economy and hence with other instruments traded in the financial markets. Others, such as demographic risks and the uncertainty as to how members or the sponsor will exercise their options, which are often far from being economically optimal, are less related to the assets held in the fund. This article describes broadly what assets are available to the institutional investor, how an investor might go about deciding on an asset allocation, and explore what the possible consequences of an asset allocation might be.

On Welfare Effects of Increasing Retirement Age

On welfare effects of increasing retirement age