PROJECT M

The shift from DB to DC

02/12/2016

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Dear user, the PROJECT M Global Pension Atlas has been updated.

Explore the graphic to follow pension reforms around the world.


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The shift from DB to DC

Despite efforts to balance all three pillars of the pension system, countries worldwide find themselves at different stages in the shift from defined benefit to defined contribution

Label

Country Hotspot

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Pension assets as % of GDP

Shift from DB to DC

DB – Final Salary

In a final salary scheme, the benefit of the employee is defined in terms of his last drawn salary, number of years worked for the company and the annual accrual rate.

Countries: Once very popular in many developed countries, many of them now closed

Who bears the risk?

Investment

Biometric

Inflation

Fixed Costs Final Salary Scheme

DB final salary scheme but with fixed costs for the employer (e.g. 15% of pay), pension is adjusted accordingly.

Who bears the risk?

Investment

Biometric

Inflation

DB with DC underpin

“Value for money”-guarantee: Value of the final salary benefit is guaranteed not to be less than a DC benefit calculated on the basis of a multiple of the members contributions accumulated with interest.

Who bears the risk?

Investment

Biometric

Inflation

DB – CARE / Average Salary

In contrast to DB final salary schemes, the benefit is based not on the salary close to retirement but on the respective wage of the employee during her career. In a Career Average Revalued Earnings plan (CARE, the earnings are revalued on the basis of and index (e.g. CPI)).

Countries: Netherlands

Who bears the risk?

Investment

Biometric

Inflation

Fixed Benefits Plan

Under a fixed benefit plan, the member is granted a fixed amount of annual pension each year. The fixed sum awarded is increased each year depending on pay-bargaining exercise.

Countries: Germany

Who bears the risk?

Investment

Biometric

Inflation

DB – Retirement Balance Scheme

Also known as final salary lump sum and pension equity scheme. A retirement balance scheme provides a lump sum at retirement calculated as the multiple of an accrual amount.

Countries: Formerly common in Australia; still often used in Japan; emerging in Belgium

Who bears the risk?

Investment

Biometric

Inflation

Sequential Hybrid Scheme

Also referred to as “nursery scheme”. Starts as a DC plan and is afterwards converted into a DB plan. The conversion point is defined by e.g. age or years worked.

Who bears the risk?

Investment

Biometric

Inflation

Combination Hybrid Scheme

Scheme offers a DB pension up to a ceiling (e.g. basic salary), further contributions are DC based.

Countries: Sweden ITP 2 and ITPK pension plan for white collar workers born before 1993

Who bears the risk?

Investment

Biometric

Inflation

Cash Balance Scheme

The benefit is defined as an individual account with the scheme. Rate of contributions and rate of investment is predefined. The predefined return will be credited to member’s account. The accumulated lump sum is used to buy an annuity.

Countries: Switzerland; Emerging type in the United Kingdom; introduced in the 1980s in the United States

Who bears the risk?

Investment

Biometric

Inflation

DC with employer sponsored Annuitization

DC which switches to DB at the point of retirement. Employer offers annuity rate and takes the annuity conversion risk.

Who bears the risk?

Investment

Biometric

Inflation

DC with DB Underpin

Scheme provides a minimum pension, based on what a corresponding DB scheme would have paid, in case investment return was poor. Employee / employer risk attribution depends to a high degree on the level of the guarantee.

Who bears the risk?

Investment

Biometric

Inflation

Targeted Benefit Scheme

Also known as defined ambition or collective DC scheme. DC scheme but the aim is to deliver a targeted pension, therefore contributions vary over time.

Countries: Under discussion in the United Kingdom and the Netherlands

Who bears the risk?

Investment

Biometric

Inflation

Pure DC

In a defined contribution scheme the plan member takes the investment, mortality and inflation risk. In many plans he is responsible for the investment choice. At the time of retirement she receive the contributions made to the account plus/minus any accrued investment gains and losses.

Countries: US’s 401k is an example of a pure DC scheme

Who bears the risk?

Investment

Biometric

Inflation