Lessons from the Efforts to Manage the Shift Away from Defined Benefit Plans to Defined Contribution Plans in Australia, the United Kingdom, and the United States
104 Pages Posted: 9 Sep 2014 Last revised: 4 May 2016
Date Written: August 26, 2014
This Article examines what lessons may be learned from examining how Australia, the United Kingdom, and the United States have tried to manage the shift away from defined benefit plans towards defined contribution plans. This shift has fundamentally changed the relationship between workers and the financial industry. While defined contribution plans provide employees with some advantages over defined benefit plans (e.g., portability, early vesting, greater autonomy), they also force employees to manage certain risks (longevity risk, investment risk) that they are ill prepared to manage. In addition, the differences in the way funds in defined contribution plans and defined benefit plans are managed affects the distribution of funds within financial markets that is potentially damaging to the economy. For example, these differences can lead to decreases in efficient allocation of investments and the creation of asset bubbles. These factors played a role in the recent financial crisis and, if left unaddressed, may contribute to future financial crises.
Keywords: Pensions, Defined Contribution Plans, Defined Benefit Plans, Financial Services Regulation, Financial Crisis
JEL Classification: G20, G22, G23, G28, J26, J38, K20, K22, M52
Suggested Citation: Suggested Citation