Large declines in defined benefit plans are not inevitable: the experience of Canada, Ireland, the United Kingdom, and the United States

Large declines in defined benefit plans are not inevitable: the experience of Canada, Ireland, the United Kingdom, and the United States

Causes of the decline in defined benefits pension plans

Looking at the United States, Canada, the UK, and Ireland, this report evaluates the causes of decline in defined pension benefit plans and the move toward defined contribution pension plans. Focusing on the regulatory environment, including changes in accounting rules, it investigates the hypothesis that the costs of providing defined benefit plans have increased relative to the costs of providing defined contribution plans.

The authors stress that large declines in defined benefit plans that have occurred in some countries are not inevitable. They can be prevented or reversed by public policy if governments decide that preserving defined benefit plans as an important part of the retirement income system is desirable. Public policy changes in this respect can be grouped into three categories: 1) changes that reverse policies that have lead to the decline in defined benefit plans, 2) innovative policies that strengthen defined benefit plans by shifting some of the cost and risk to workers, and 3) policies that level the playing field with defined contribution plans by providing stricter regulation of defined contribution plans.

Key concluding points include:

  • the decline in defined benefit plans has generally been larger among small plans than among large plans, which appears to be consistent with an explanation focusing on regulatory costs
  • the principle of a level playing field between defined benefit and defined contribution plans may have helped to preserve defined benefit plans in Canada
  • defined benefit plans in Canada have an advantage over defined benefit plans in the United States in that they can be financed in part by tax deductible employee contributions
  • in all four countries, it appears that unexpectedly large increases in life expectancy have played a role in the decline in defined benefit plans. Defined benefit plans in none of these countries provide benefits that are indexed to increases in life expectancy