Transition from Defined Benefit to Target Benefit
Mary Hardy, David Saunders, and Xiaobai Zhu
Department of Statistics and Actuarial Science, University of Waterloo
This article is a summary of the paper by the same authors, titled "Long and short term optimal transition from a defined benefit to a target benefit pension plan”.
As Defined Benefit (DB) pension plans in Canada experience funding shortfalls and contribution volatility, Target Benefit (TB) plans have been proposed as potential replacements, with fewer disadvantages for participants than Defined Contribution (DC) plans, and with better opportunities for controlling costs and volatility than traditional DB. In this work, we develop a model TB plan which is designed to provide fair and sustainable benefits over the long term, and we propose a strategy for transition from a traditional DB plan to the TB plan, taking into consideration the different risks for different cohorts.
The major findings of the paper are (1) that the TB plan can be designed in a way that is sustainable, with transparent risk sharing between generations, and (2) that a phased age-dependent transition from DB to TB ensures that older retirees are not worse off after transition, with respect to the risk of catastrophic loss of income.