The Economic Impact on Plan Members of the Shift from Defined Benefit to Defined Contribution in Workplace Pension Plans Workplace Pensions: Next Generation or Final Frontier

The overarching theme of this paper is whether future retirees are likely to have an adequate standard of living in retirement, and related policy issues. The author begins by outlining Canada's three-pillared retirement income sys- tem, and by identifying the similarities and differences between defined benefit (DB) pension plans and defined contribution (DC) pension plans. Given the relative imprecision of these terms, the author cautions against treating pension plan design as a binary choice between DB and DC. The dimensions of the ongoing shift from DB to DC plans are measured by reference to information from Statistics Canada. The paper goes on to consider the capacity of DB and DC plans to generate pension income, through an examination of comparative data on contributions, rates of return and expenses. The paper also asks whether participants in DB plans enjoy an advantage over participants in other types of plans, in terms of accumulation of retirement wealth. As a corollary to this question, the author reviews several studies that attempt to map the range of benefit outcomes in DC plans. In sum, the author concludes that the switch from DB to DC increases the unpredictability of retirement income, manifested as both unpredictable retirement ages and unpredictable levels of income. Recent attempts have been made to enhance the predictability of contributions and benefits by creating plan designs which incorporate elements of both DB and DC, i.e. target benefit plans. However, the author points out, of almost equal importance to the issue of plan design is the issue of identifying appropriate organizational platforms for the delivery of pension benefits.