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Risk Sharing Pension Plans:

Sustainability, Affordability, Adequacy, and Fairness

Final Report

Mary Hardy, David Saunders and Xiaobai Zhu

About this Report:

Traditional final average salary defined benefit (DB) plans are declining, largely because of the volatility of costs. However, the defined contribution (DC) design has significant and important deficiencies, including uncertain and potentially inadequate retirement income. In this paper we adapt results from theoretical, stylized work on pension design, to explore a form of target benefit plan that allows for structured, transparent intergenerational risk sharing (IRS). We compare the IRS plan design with the traditional DB design, based on five broad areas of comparison: affordability (average cost), sustainability (volatility of costs), efficiency, adequacy of benefits, and fairness.