Defined Benefit Schemes Research Articles

On welfare effects of increasing retirement age

We develop an OLG model with realistic assumptions about longevity to analyze the welfare effects of raising the retirement age. We look at a scenario where an economy has a pay-as-you-go defined benefit scheme and compare it to a scenario with defined contribution schemes (funded or notional). We show that, initially, in both types of pension system schemes the majority of welfare effects comes from adjustments in taxes and/or prices. After the transition period, welfare effects are predominantly generated by the preference for smoothing inherent in many widely used models. We also show that although incentives differ between defined benefit and defined contribution systems, the welfare effects are of comparable magnitude under both schemes. We provide an explanation for this counter-intuitive result.

'Sustainable and Affordable'? Actuarially Fair Contribution Rates for the USS Pension Scheme

We compute actuarially fair contribution rates (aggregating both employers' and employees' contributions) for the USS pension scheme, using UK life tables and market yield curves. The fair rate is sensitive to life expectancy and the level of real yields, neither of which appears stationary. So any scheme predicated on a constant contribution rate is inherently unstable. We therefore argue that, to survive, defined benefit schemes such as USS must explicitly incorporate time variation in contribution rates, ideally along with some dependence on individual characteristics. Our formulae in principle provide an objective, verifiable and implementable methodology to calculate such fair contribution rates.

New Dutch pension contracts and lessons for other countries

AbstractThis paper summarizes recent developments in Dutch occupational pensions of both the defined contribution and defined benefit (DB) types. A reform of DB schemes is discussed that introduces financial assets as individual entitlements. At the same time, the reformed schemes derive (dis)saving, financial risk management and insurance decisions from the explicit objective of adequate and stable lifelong retirement income. The proposed system also involves an insurance contract pooling longevity risks and possibly collective buffers that share systematic risks with future pension savers. The paper identifies the strengths and weaknesses of the Dutch contract design and draws lessons for other countries.

Apples and Oranges: A Comparison of the Key Features of the Legislative and Regulatory Framework for UK and Dutch Defined Benefit Pension Schemes (Including Dutch CDC Schemes)

The UK and the Netherlands have different legal and regulatory regimes for defined benefit pension schemes. This paper compares and contrasts the key features of those regimes. The UK allocates all of the underfunding risk in a UK defined benefit pension scheme to the employer, backed up by the Pension Protection Fund in the event of the insolvency of the employer. In the Netherlands, the risk of an underfunding in a defined benefit scheme or CDC Scheme is shared amongst the members. There is no Pension Protection Fund. However, the funding standards in the Netherlands are prescriptive (in part because a Dutch pension fund is treated as a “regulatory own fund” for the purposes of Article 17 of the IORP I Directive (Directive 2003/41/EC)). The length of time for making good a deficit is prescribed with the benefits having to be reduced if the deficit is not made good to the required minimum funding standard within 5 years. In the UK defined benefit pension schemes are not regulatory own funds. Funding standards are based on “prudence” and account is taken of support of the employer (the “employer covenant”). Furthermore, there is considerable flexibility in the period over which a deficit in a UK defined benefit pension scheme is to be made good.

On Welfare Effects of Increasing Retirement Age

We develop an OLG model with realistic assumptions about longevity to analyze the welfare effects of raising the retirement age. We look at a scenario where an economy has a pay-as-you-go defined benefit scheme and compare it to a scenario with defined contribution schemes (funded or notional). We show that, initially, in both types of pension system schemes the majority of welfare effects comes from adjustments in taxes and/or prices. After the transition period, welfare effects are predominantly generated by the preference for smoothing inherent in many widely used models. We also show that although incentives differ between defined benefit and defined contribution systems, the welfare effects are of comparable magnitude under both schemes. We provide an explanation for this counter-intuitive result.

The Contradictions of Pension Fund Capitalism ed. by Kevin Skerrett et al.

Reviewed by: The Contradictions of Pension Fund Capitalism ed. by Kevin Skerrett et al. Andrew Stevens Kevin Skerrett, Johanna Weststar, Simon Archer, and Chris Roberts, eds., The Contradictions of Pension Fund Capitalism (Ithaca: Cornell University Press 2017) Published in 2017 as part of the Labor and Employment Relations Association Series, The Contradictions of Pension Fund Capitalism assembles an international cast of researchers that bridge financial capitalism with the crude reality of employment entitlements that are increasingly under threat. The editors begin with a concise introductory chapter that captures the focus of subsequent contributions. "Invested across the planet," Skerrett, Weststar, Archer, and Roberts write, "in every conceivable industry, commodity, and asset class, pension funds are today leading agents in, and beneficiaries of, liberalized and globally integrated markets." (1) The narrative throughout the book is one that follows an unraveling of the post-war class compromise and the various features that have jeopardized pensions coverage and benefit entitlements. [End Page 306] Andrew Pendelton and Howard Gospel's treatment of the UK experience in Chapter 2 similarly claims that the development of an employer-based or occupational pension scheme contributed to financialization through the marshaling of a "large and liquid stock market and financial sector." (10) From here the authors examine today's reality in which, as a neoliberal policy agenda that launched in the 1980s, individualized self-invested personal pensions (SIPPS) have become fashionable. SIPPS have, of course, failed to fill gaps in provision, instead leading to pockets of pensioner poverty whereby retirees must rely on other means-tested and universal benefits in order to survive. Financialization has also provoked firms to respond to competitive pressures by adopting human resource requirements that rest on flexible and less costly labour forces. Financial capitalism is advancing this objective to a point where, the authors conclude, defined benefit schemes "have 'fed the beast' that eventually turned on them." (24) Chapter 3 moves from the political economic structure of finance capitalism to investigating the effects on workers across industrialized countries. Specifically, the extent to which the reduction of benefits in the pay-as-you-go (paygo) state social insurance plans and the emphasis on savings and personal wealth as a source of retirement income defines the lived realities of financialization and the erosion of formerly collective entitlements. What Teresa Ghilarducci and Amanda Novello recognize is that life expectancy, leisure time, and health outcomes are not shared evenly across classes and that, ultimately, higher-income workers "are most likely to have the economic lives that dovetail well with a financial retirement system." (49) Dick Bryan and Michael Rafferty further engage with the outcome question in Chapter 4, concluding that the "defined contribution superannuation is one of the starkest expression of the risk shift from states to citizens, and the associated role of finance." (80) A reversal, they point of out, of the Keynesian macroeconomic policies that dominated the political arena for decades. What the authors go on to query is the extent to which labour's capital represents a check on capital's power. Their resolution: labour's capital, manifested in pension funds, has behaved just like "capital's capital," providing little hope of wielding these massive pools of wealth to advance workers' interests. Indeed, their contribution is punctuated by the realization that labour is not just a working and consuming class but exists also as a financialized asset for capital. (93) To these points, Michael McCarthy addresses the social investment framework - or, concerns about environmental, social, and governance (esg) factors - that took off following the 2008 Great Recession. His conclusion here is that workers' retirement capital mirrors that of Wall Street investment trends, as conservative law makers and employers have blocked unions from "democratizing their funds and advancing an alternative approach to finance." (115) Contradictions also reveals the role of fiduciary responsibility in disciplining union pension trustees who might look to labour's capital as a venue to advance non-financial interests. Bernard Mees reflects on the realities of financialization in Australia and what impact this has had on the running of union-sponsored pension schemes. Part of the lived reality is how labour has responded to the growth of infrastructure privatization and subsequent investment...

The ABCs of nonfinancial defined contribution (NDC) schemes

AbstractNonfinancial defined contribution (NDC) pension schemes have been successfully implemented since the mid‐1990s in a number of European countries such as Italy, Latvia, Norway, Poland and Sweden. The NDC approach features the lifelong contribution–benefit link of a financial defined contribution (FDC) personal account scheme, but is based on the pay‐as‐you‐go (PAYG) format. At its start out, the PAYG commitments of the preceding defined benefit (DB) system are converted into individual personal accounts, allowing for a smooth transition from the DB to the DC format, while avoiding the very high transition costs inherent in a move from a traditional PAYG DB scheme to a fully funded FDC scheme. The NDC approach implemented by the rule book is able to manage the economic and demographic risks inherent to a pension scheme and, by design, creates financial sustainability. As in any pension scheme, the linchpin between financial stability and adequacy is the retirement age; in the NDC approach the individual retirement age above the minimum age is by design self‐selected and by incentives should increase the effective retirement age in line with population ageing. As a systemic reform approach NDC has become a strong competitor to piecemeal parametric reforms of traditional nonfinancial DB (NDB) schemes. While frequent, these reforms are far from transparent and usually too timid and too late to create financial sustainability while providing adequate pensions for the average contributor. This article offers a largely non‐technical introduction to NDC schemes, their basic elements and advantages over NDB schemes, the key technical frontiers of the approach, and the experiences of NDC countries.

The cost and value of UK pensions

AbstractOver the last 20 years, the extent of defined benefit provision has declined substantially in the United Kingdom. Whilst most of the focus has been on deficits relating to past benefit accrual, the increasing cost of future benefit accrual is also important. There are two reasons for this. First, the change in the cost of defined benefit accrual represents the difference in the earnings for employees with membership of a defined benefit scheme and those with membership of a defined contribution scheme. Second, the current cost of defined benefit accrual gives an indication of the cost of an adequate pension. As such, it can be compared with levels of contribution to defined contribution schemes to determine whether these are adequate. I therefore look at how the cost of pensions has changed relative to the cost of non-pensions earnings. I also look at the main components of the change in pensions cost – those relating to benefits payable, discount rates and longevity – to analyse their relative importance. I find that the cost of employing a member of defined benefit pension scheme has consistently outpaced the cost of employing someone in a defined contribution arrangement. I also find that the current cost of accrual is significantly higher than the average level of payments to defined contribution schemes.

Supreme Court Restricts the Scope of the VAT Exemption for the Management of Special Investment Funds in the Netherlands

Defining the term “special investment fund” in the VAT exemption for the management of special investment funds, the Dutch Supreme Court opts to follow the referral of the Fiscale Eenheid X case and rules on the management of a pension fund executing a defined-benefit scheme.

The shift to the defined contribution pension scheme: an Italian case

Many countries are facing up to the problem of the financial sustainability of their pension systems by the transition from the defined benefit scheme to the defined contribution one. However, the defined contribution formula alone does not guarantee sustainability. There are many economic, financial and demographic factors to be taken into consideration, the first of which being the rate of return to be paid on contributions and benefits. This article deals with the shift to the defined contribution scheme in contexts of economic and demographic instability, in which the steady state does not occur substantially, with reference to one of the largest Italian statutory pension systems for professional workers. We propose a new way to structure and manage a pension system on the basis of a general principle, we also provide a proper rule for the rate of return on the pension liability as well as a pension indexation rule differentiated for both defined contribution and defined benefit pensions in order to improve intergenerational equity.

The Funded Pension Scheme and Economic Growth in Nigeria

This study provided evidence on the effect of the operation of the funded pension scheme since its inception in 2004 on economic growth in Nigeria using error correction mechanism (ECM) and Ordinary Least Square (OLS) methodologies. Findings revealed that the pension fund contributions from both private and public sectors in Nigeria increased greatly and constituted a huge investment fund in the capital and money markets. This increased liquidity in the economy and created employment opportunities as well as improvement in the investment climate. The study concluded that with good risk and portfolio management by pension fund administrators and custodians, the contributory pension has the capacity to boost the Gross Domestic Product (GDP) in Nigeria and very convenient to retirees compared to the previous defined benefit scheme. The study however recommended the removal of delay payment, administrative bottlenecks and corruption in the management of the pension fund in order to boost economic growth in Nigeria.

The perception of the contributory pension scheme administration by the staff of University of Benin

This paper x-ray the perception of the staff of University of Benin on the contributory pension scheme administration. The research instruments used in the data collection were structured questionnaire and face to face interview. A sample size of 250 made up of both the academic and non-academic staff were selected from the total populations of about 5,000 staff. The research findings indicated non-significant relationship between the variable on the hypothesis. They faulted the scheme for lack of transparency and accountability and the life time pension payment as in defined benefit scheme. Based on the finding, appropriate recommendations were made to make the scheme attractive.

A review of babatunde alayande’s “funded pension, financial sector development and economic growth in nigeria”

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 Greatest Good for the Greatest Number: An Examination of Early Intervention Strategies for Trustees and Sponsoring Employers of Stressed Defined Benefit Schemes

The report highlights the acute pressure faced by many private-sector defined benefit schemes and their trustees as they strive to meet their long-term liabilities. It predicts that the businesses of hundreds of employers will become insolvent well before the end of their recovery plans, under which the trustees and sponsor agree contributions to make good the deficit over an agreed number of years. On insolvency, these schemes may have insufficient funds to pay members’ pensions in full. The report argues that this worst-case scenario can be averted if the approach to managing pensions changes to one that is prepared for many more schemes to pay less than full benefits on a planned and co-ordinated basis, with all parties in agreement on how best this is achieved. Freeing an employer from the burden of its pension fund, whilst avoiding insolvency, can create extra value which can be shared with the members to achieve a better outcome.

Comment on “Public Pension Programs in Southeast Asia: An Assessment”

Comment on “Public Pension Programs in <scp>S</scp>outheast <scp>A</scp>sia: An Assessment”

Challenges and Prospects of Contributory Pension Scheme in Nigeria

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.

Population Aging and Growth: The Effect of Pay-as-You-Go Pension Reform

This paper examines how pay-as-you-go (PAYG) pension reform from a defined-benefit scheme to a defined-contribution scheme affects economic growth in an overlapping-generations model with endogenous growth. We show that in economies in which the old-age dependency ratio is high and the size of pension benefits under a defined-benefit scheme is large, such a pension reform mitigates the negative growth effect of population aging caused by a decline in the population growth rate or an increase in life expectancy.

Supporting Materials for ‘The Greatest Good for the Greatest Number: An Examination of Early Intervention Strategies for Trustees and Sponsoring Employers of Stressed Defined Benefit Schemes’

Supporting Materials for The Greatest Good for the Greatest Number: An examination of early intervention strategies for trustees and sponsoring employers of stressed defined benefit schemes

Defined Benefit vs Defined Contribution or is There a Third Way? Defined Ambition Schemes: An Alternative Approach to Risk Sharing

Over the past 30 years there has been a significant decline in participation of Defined Benefit (DB) schemes. In their place, Defined Contribution (DC) schemes have offered two important things: to employers, a fixed contribution rate without an ongoing liability to cover any shortfall in funding; and to members, an identifiable “account” with investment choice. While these changes have brought certain benefits to both employers and members, they have resulted in a significant transfer of risk (viz: investment risk, inflation risk, sequencing risk and longevity risk) from employers to members who, arguably, are not best placed to manage these risks. There is however a “third way” between pure DB schemes and pure DC schemes known as Defined Ambition (DA) schemes. This approach to risk sharing is relevant for Australia as the focus shifts from accumulation to de-accumulation and the search for new ways to provide stable, certain and reliable incomes to Australians in retirement.

What Should Be Done About the Underfunding of Defined Benefit Pension Schemes? A Case Study of Ireland

Defined Benefit (DB) pension schemes have prevalence in certain countries, most notably the UK. This is also the case for Ireland. Underfunding of DB pension schemes is prevalent throughout the Western world, and no more so than Ireland. This paper examines underfunding of DB schemes in Ireland and discusses alternative ways of overcoming this problem. It critically reviews alternative government sponsored insurance schemes including the US Pension Benefit Guaranty Corporation (PBGC) and the UK Pension Protection Fund (PPF), underpinned by the introduction of risk-based levies. Commentators have suggested introducing some variant of the latter scheme in Ireland. The paper also examines alternative schemes that have been proposed to understand the dynamics of the level of underfunding and how this can be addressed. Finally it examines the risks inherent in DB schemes and details how these will affect the introduction of any mechanism that tries to address the levels of underfunding in Ireland.