Global Pension Crisis: Unfunded Liabilities and How We Can Fill the Gap

CHAPTER 5

Reinventing Retirement

The world of retirement is generally broken into two distinct categories; defined benefit plans and defined contribution plans. There are other forms coming into the picture called hybrid plans, which are clearly a blend of these two building block styles. Before you can really understand the state of the pension universe you really do need to understand the distinction between these two types of plans and the problems and pros and cons that each enjoy.

DEFINED BENEFIT PLANS

A defined benefit plan promises the participant a specific monetary benefit at retirement and may state this as an exact amount or a portion of the final or average final salary earned. Monthly benefits are sometimes calculated via a formula that incorporates a participant's years of service in addition to absolute or average salary level. Participants are not required to make investment decisions and these are generally made by a professional pension management team whether the fund is a private or public fund. Those teams may or may not manage some or all of the money themselves or tender it out to outside managers. A defined benefit plan is sometimes referred to as a fully funded pension plan, which is clearly a gross misnomer if applied generically since full funding would obviate the need for this very book and this is decidedly not the case in many, many plans.

The advantages of defined benefit plans are primarily that they provide participants with (as their name implies) ...