The Rise and Demise of Defined Benefit Pension Plans

Abstract

The Defined Benefit Pension Plan (DBPP), once regarded as the gold standard of traditional corporate pension plans, has fallen upon hard times. Corporate sponsors regard the plans as financial drains, fountains of bad publicity, and targets for heavy-handed government regulation. Employees covered by the plans fear they will not deliver on the promises employers made to provide financial security after retirement. Legislative fixes for the system have hastened, not slowed down, the exodus of employers from DBPP. The authors of this paper agree that DBPP is, indeed, an endangered species in the private sector, but concur with the criticism that the conventional explanations for it – particularly in the trade literature – tend be self-serving, superficial and not convincing and often incomplete in their analysis. Using Porter’s model of competition to identify the relative strengths and weaknesses of competing influences we endorse the conclusion that the failure of DBPP is one of strategic choice by employers whose power and influence in the global economy is not effectively counter-balanced by labor, or by forces sympathetic to labor. The growing trend towards the Defined Contribution Pension Plan (DCPP) is consonant with employers’ interests but a setback for employees who had to give up the “gold standard” (DBPP). Even the paradoxical effect of ERISA hastening the demise of the pension system it was created to reform is less puzzling when examined in the context of who had influence in drafting the legislation, writing regulations and enforcing the law.