Myth busting: Defined contribution Clearing up common misperceptions about defined contribution pension schemes

Abstract

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.