A towords from defined contribution to defined benefit pension scheme
Distinguish between defined-benefit and defined-contribution pension schemes. Why are defined-contribution pension schemes becoming more important?
Content
1. Introduction
2. Differences between DB and DC
2.1 Evaluation of retirement payment
2.2 Risks for employers and employees
2.3 Incentives
3. The reasons for DC becoming prevalent and important
3.1 Financial perspective
3.2 Costs and risks
3.3 Industry composition and labour force demographics
4. Conclusion
5. References
1. Introduction
The general area of pension schemes is widely discussed currently. In particular over the past three decades, the issue of graduate shifting from defined-benefit (DB) pension to defined-contribution (DC) pension schemes has received considerable attention (Broadbent, Palumbo and Woodman 2006). The main reason is the growing of pension fund caused by increasingly longevity that could lead to underfunding with DB plan (Cocco and Lopes 2011). DB is defined as the retirement benefit of employees based on how many years of service to the organisations. It will be on the basis of final service year’s salary and determined by a formula. Unlike DB, each employee in DC pension scheme has an account if they have a contributory plan. The benefit gained is based on the accumulative total contribution and return on investment in the account (Bodie, Marcus and Merton 1988:139). The overall structure of this paper is as follow: first it discusses the topic of different characteristics for DC and DB pension schemes. It is crutical to examine this area in order to demonstrate the next section that the reasons for DC pension plans turning into more important. Finally, a comprehensive conclusion and recommendation will be outlined.
2. Differences between DB and DC
From the nature of pension schemes, both of DB and DC plans are supervised and regulated by legislation in order to guarantee the employee’s advantages and could offer tax benefits (Broadbent, Palumbo and Woodman
Content
1. Introduction
2. Differences between DB and DC
2.1 Evaluation of retirement payment
2.2 Risks for employers and employees
2.3 Incentives
3. The reasons for DC becoming prevalent and important
3.1 Financial perspective
3.2 Costs and risks
3.3 Industry composition and labour force demographics
4. Conclusion
5. References
1. Introduction
The general area of pension schemes is widely discussed currently. In particular over the past three decades, the issue of graduate shifting from defined-benefit (DB) pension to defined-contribution (DC) pension schemes has received considerable attention (Broadbent, Palumbo and Woodman 2006). The main reason is the growing of pension fund caused by increasingly longevity that could lead to underfunding with DB plan (Cocco and Lopes 2011). DB is defined as the retirement benefit of employees based on how many years of service to the organisations. It will be on the basis of final service year’s salary and determined by a formula. Unlike DB, each employee in DC pension scheme has an account if they have a contributory plan. The benefit gained is based on the accumulative total contribution and return on investment in the account (Bodie, Marcus and Merton 1988:139). The overall structure of this paper is as follow: first it discusses the topic of different characteristics for DC and DB pension schemes. It is crutical to examine this area in order to demonstrate the next section that the reasons for DC pension plans turning into more important. Finally, a comprehensive conclusion and recommendation will be outlined.
2. Differences between DB and DC
From the nature of pension schemes, both of DB and DC plans are supervised and regulated by legislation in order to guarantee the employee’s advantages and could offer tax benefits (Broadbent, Palumbo and Woodman
References: Aaronson, S. and Coronado, J. (2005) Are Firms or Workers Behind the Shift Away from DB Pension Plans? [online] available from <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=716383> [Accessed: 20 March 2015] Bodie, Z., Marcus, A Blake, D. (2003) ‘The UK pension system: Key issue’. An International Journal 8, 330-375. Cocco, J. F. and Lopes, P. (2011) ‘Defined benefit or defined contribution? A study of pension choices’. The Journal of Risk and Insurance 78 (4), 931-960. Dafria, A. (2002) The Rise in Defined Contribution Pension Plans And The Stock Market Boom [online] available from <https://www.stern.nyu.edu/sites/default/files/assets/documents/uat_024339.pdf> [Accessed: 30 March 2015] Duxbury, D., Summers, B., Hudson, R. and Keasey,K. (2011) ‘How people evaluate defined contribution, annuity-based pension arrangements: A behavioural exploration’. Journal of Economic Psychology 34, 256-269. Even, W. E. and Macpherson, D. A. (2007) ‘Defined Contribution Plans and the Distribution of Pension Wealth’. A Journal of Economy and Society 46 (3), 551-581. Josian, J., Gough, O., Haslam, J. and Shah, N. (2013) ‘Corporate reporting implication in migrating from defined benefit to defined contribution pension schemes: A focus on the UK’. Accounting Forum 38, 18-37.