Moving Beyond the ‘DB Vs. DC’ Debate: The Appeal of Hybrid Pension Plans

Blommestein, Hans J.; Janssen, Pascal; Kortleve, Niels; Yermo, Juan

doi:10.2139/ssrn.1493333

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Moving Beyond the ‘DB Vs. DC’ Debate: The Appeal of Hybrid Pension Plans

Rotman International Journal of Pension Management, Vol. 2, No. 2, Fall 2009

12 Pages Posted: 28 Oct 2009

See all articles by Hans J. Blommestein

Hans J. Blommestein

Vivid Economics; Organization for Economic Co-Operation and Development (OECD); Tilburg University - Tilburg University School of Economics and Management

Juan Yermo

Organization for Economic Co-Operation and Development (OECD)

Date Written: October 13, 2009

Abstract

This article analyzes the tradeoffs between uncertainties in contributions and benefits embedded in different pension arrangements. The two key criteria for evaluating the risk-sharing characteristics of a private pension plan from the perspective of the plan member are the funding ratio (ratio of assets to liabilities) and the replacement rate (ratio of benefits to salaries). The stochastic simulations performed (considering financial risks only) show that hybrid plans (those in between traditional defined benefit and individual defined contribution) can offer efficient and sustainable forms of risk-sharing. The appeal of different hybrid plans depends very much on the regulatory, social, and economic environment. In situations where funding excesses can be efficiently and fairly apportioned, conditional indexation plans appear to have the greatest potential as sustainable forms of risk-sharing. However, the appropriate design of hybrid plans requires careful consideration of the relative pension plan risks that can be borne by working and retired individuals.

Keywords: Defined Benefit, Defined Contribution, Funding, Hybrid Plans, Pension Benefits, Pension Funds

Suggested Citation: Suggested Citation

Blommestein, Hans J. and Janssen, Pascal and Kortleve, Niels and Yermo, Juan, Moving Beyond the ‘DB Vs. DC’ Debate: The Appeal of Hybrid Pension Plans (October 13, 2009). Rotman International Journal of Pension Management, Vol. 2, No. 2, Fall 2009, Available at SSRN: https://ssrn.com/abstract=1493333 or http://dx.doi.org/10.2139/ssrn.1493333