IB#9-21

Introduction

Over the past half century, employer-sponsored defined benefit (DB) pensions have been crucial sources of retirement income and security.  However, the popularity of DB pensions in the private sector has dwindled, and competitive pressures may drive DB plans from the private sector altogether.  Significantly, this burden is not only a US phenomenon, as UK private plan sponsors are also struggling to manage their DB pension commitments.  Nonetheless, a fundamental difference of opinion exists between UK and US policymakers about how to address the decline of the DB system.

In the United Kingdom, DB stakeholders have accepted the plans’ decline as inevitable and are now promoting alternative mechanisms to shore up retirement security.  For example, in the Pensions Act of 2008, the UK government mandated that employers enroll eligible employees into a workplace pension and created a new second pillar pension institution, the Personal Accounts Delivery Authority (PADA), to facilitate the new policy.  In addition, UK policymakers, and indeed most DB stakeholders, have endorsed the use of pension buyouts as a way to manage the decline of this once important institution.  A buyout allows firms to pay an insurance company a fee to take over the assets and liabilities of their plan, thereby freeing them from their DB obligations.  As such, UK policymakers perceive buyouts to be part of the process of unwinding an unsustainable institution, and most see the rising popularity of pension buyouts as a direct response to the increasingly burdensome nature of DB pensions...

For full paper in PDF

For related working paper