La asignatura impartida y las prácticas en evaluación de aprendizajes de los

The three most common types of workplace pension schemes are DB, DC and hybrid schemes, which are briefly described below.

DB schemes: Under a DB scheme, the employer promises a specified retirement pay- ment to the employee, depending on a formula that is usually based on salary and pensionable service (an employees’ final or average salary over the whole period of scheme membership). DB schemes are typically financed via a book reserve system, externally funded schemes, or a PAYG system (Social Protection Committee, 2008). Under a book reserve DB schemes are financed internally. Companies build up re-

10_{Chapter five provides further insights into how pensions have been used to manage human}

serves to pay pension obligations, which they most often have to re-insure. Externally funded schemes (where the pension resources are kept separate from the company) are managed by an external provider (e.g. insurance companies, investment funds, or pension funds). A PAYG system, under which pensioners are paid out of current employees’ contributions, is typically only used by government, local authorities and other public sector employers, as the general rational is that the government cannot go bankrupt (Terry & White, 1995). Regardless of the funding system used, under a DB plan, an employer bears the risks of providing the promised pension value to an employee (Broadbent, Palumbo, & Woodman, 2006). Sometimes, employers re- insure the liabilities and therefore move some of the risks to an insurance company or an external protection fund. The main employer risk when providing DB schemes is the obligation to provide the defined benefit to employees, regardless of the perfor- mance of financial markets or the company. In return, employees hold the risk not to receive any or reduced pension benefits in case of insolvency of the company (or the external provider) (Besley & Prat, 2003; Broadbent, Palumbo, & Woodman, 2006). Additionally, DB plans are inflexible in transferring pension rights when changing em- ployers, and are usually subject to “vesting rules”, under which employees only receive pension rights after a defined period of time (ranging from one to up to ten years). These features limit labour market flexibility (G. L. Clark & Monk, 2006).

DC schemes: Typically, under a DC scheme, a fixed monthly contribution rate (of employees’ earnings) to a scheme is made. The contribution is sometimes labelled as employee or as employer contribution. Pension benefits are made up of the con- tributions (which can vary depending on age, service, or target benefit) as well as any additional investment returns over the years. Only employer contributions are guaranteed under a DC scheme, not final benefits (Besley & Prat, 2003; Broadbent, Palumbo, & Woodman, 2006; Social Protection Committee, 2008). DC schemes are usually fully funded, and managed by third party providers such as insurance com- panies, mutual funds, or banks (Social Protection Committee, 2008). Overall, DC schemes are considered to be less risky for employers, as the employee bears most of the risk. In return, employees benefit from a scheme’s portability, lack of vest- ing rules, and the opportunity to choose the best investment strategy for personal circumstances.

Hybrid plans: Collective plans which share the risks between employees and employ- ers, hence include some DB as well as DC characteristics, are classified as hybrid plans (Broadbent, Palumbo, & Woodman, 2006; G. L. Clark & Monk, 2006). There are many different types of hybrid plans, each varying in the degree of DB and DC exposure. In more recent political debates one type of hybrid arrangement has attrac- ted particular attention: Collective DC. Under this system, employer and employee contributions are fixed (like under a DC plan), yet the assets are collectively invested and risks are pooled, hence can provide some guarantee to the final pension payable (Boelaars, Cox, Lever, & Mehlkopf, 2014).

Pension arrangements are either provided on an individual basis or under a collective agreement. Under an individual arrangement, the employee enters into an agree- ment with the employer (under a DB scheme) or with a third party provider (for a DC scheme). Pension scheme adjustments are largely subject to the employers’ de- cision taking, often steered by legislative requirements, risk levels and to some extent trade union involvement (where available). Under a collective agreement, the pen- sion schemes’ terms and conditions are negotiated between parties representing the employees’ and employers’ interests. In some countries, basic rules can be found in the respective labour laws.

As a summary, Table 2.3 below compares DB and DC schemes. Hybrid schemes have not been included in this comparison, as the underlying nature and plan set-up of hybrid arrangements are very variable.

DB DC Pension

payable

Employer promises specified retirement payment, depending on a formula based on salary and pensionable service

Pension benefits are made up of the employer/employee

contributions and long-term investment returns over the years Only employer contributions are guaranteed, not final benefits

Financed Via a book reserve system, externally funded schemes, or as a PAYG system

Fully funded, and managed by third parties providers (e.g. insurers, mutual funds, or banks)

Risks Employer: providing the promised pension value (regardless of financial markets/company performance)

Employee: not to receive any or reduced pension benefits in case of insolvency of the company (or the insurance if the plan was re-insured)

Employer: no direct risks (apart from compliance risks and employee workforce management risks - e.g. when employees cannot retire due to reasons described below)

Employee: cannot retire if contributions and return of investment has not been enough

Challenges Inflexible in transferring pension rights when changing employers can be subject to “vesting rules”

Market performance dependent and hence subject to fluctuations

Strengths Knowledge and understanding of employee’s pension rights

Employees benefit from a scheme’s portability and/or lack of vesting rules. Opportunity to choose the best investment strategy for personal circumstances

Trends Move to DC provision in last two decades, due to a more mobile labour market and regulatory accounting reforms

GFC has highlighted some weaknesses (further described in the next section).

Governments/employers are considering

alternatives/enhancements Table 2.3: DB and DC schemes compared

DB pension provision (from an era of long-term job tenure and extensive financial reporting standards) has decreased in the last two decades and employers have in- creasingly tried to close the risky and costly pension arrangement (Coates, 2001; Roberts, 2004; Sass, 1997). Instead, DC plans, which are considered to be less risky for the employer and more appropriate for the modern mobile labour market, have dominated the workplace pension landscape (Bridgen & Meyer, 2009; Roberts, 2004). DB pensions have largely been transformed into a benefit that is available to the ma- jority of public sector workers (often justified as a compensation mechanism for lower salaries); in some instances to industries/companies with very strong trade union in-

volvement (Terry & White, 1995); or an executive/senior management benefit in the private sector (Kelly & Gennard, 2007).