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National Pension Hub Publications

Designing Pension Plans for Fairness, Sustainability, and Transparency

Inadequacy of pure DB and DC plans lead to the development of some hybrid pension designs.

Popular examples include the DB-underpin (also known as floor offset), Cash Balance, and second-election options. However, many DB underpin plans have been wound up as the DB guarantee became too costly. Cash balance plans carry significant (and largely unacknowledged) risk to sponsors during the accumulation phase, while leaving the members with all the decumulation risk, including interest rate, longevity and dissipation (Hardy et al., 2014). Second election options, which allow a one-time transfer from DC to DB, are more expensive and less sustainable than standard DB plans (Zhu et al., 2018).

The modern search is for pension design that is sustainable, meaning that contribution volatility is limited, and that provides retirement income security for members, meaning that benefit volatility is also limited. A desire to use funds efficiently indicates value from pooling of risk, which is not exploited in DC plans. Benefit formulas, such as those used in traditional DB plans, are very attractive to members, allowing them to plan for their retirement, but also introduce potential for unfair or excessive intergenerational transfer of costs.

The purpose of this work is to investigate optimal risk sharing pension plan designs that satisfy the following criteria: 1) transparency of the plan structure, 2) sustainability of the fund, 3) welfare improvement effects, and 4) fairness between generations. This research is directly motivated by the challenges that the industry faces due to the inadequacies of both the traditional defined benefit (DB) and defined contribution (DC) designs. The research aims at the development of designs for target benefit/defined ambition (DA) plans that are fair and sustainable, as well as transparent to both plan members and plan sponsors.




University of Waterloo


Mary Hardy





Mary Hardy

Professor Hardy's research interests cover aspects of solvency and risk management for both life insurance and pension plans. The major recent focus has been in financial risk management, at the interface of actuarial science and financial engineering. She also works on the econometrics of risk management, especially for actuaries, for whom long-term horizons and deep out-of-the-money risks provide different challenges to the usual risks of banking.

Insurers began inserting financial guarantees into contracts as a means of competing with mutual funds and other investment media for stewardship of their customers' savings. Financial guarantees do not lend themselves to traditional actuarial methods, which rely on diversification to reduce risk. Two paradigms have evolved for managing such risks, the actuarial method and the financial engineering approach. In several papers, Professor Hardy developed comparisons of the two methods and considered the econometric issues related to projecting the assets underlying the guarantees. Her work has addressed variable annuities, segregated funds, guaranteed annuity options, and equity-indexed annuities.

Once the distribution of future losses has been modelled, risk measures convert the distribution to a real value for pricing or capital requirements. Professor Hardy has been involved in both the single period and the multi-period risk measure problem.

An area of current challenge for actuaries, governments, individuals and employers is the problem of designing sustainable pension solutions for employees. Professor Hardy is interested in funding and risk management of hybrid schemes, which combine the best features of the defined benefit and defined contribution systems, in a way that treats employees fairly between and across generations, and that shares risks between employees and the plan sponsor in a way that is appropriate and sustainable through different economic conditions.