There’s a debate raging about whether defined contribution (DC) plans are the best options to solve for the retirement crisis which promises to become more acute as people live longer. With DB plans a memory and not viable for a transient workforce and for employers that don’t want to be on the hook for future liabilities, is there something in the middle that might solve the problem. Enter hybrid DC plans.
A recent Bloomberg article suggests that hybrid DB/DC plans called Collective DC (CDC) plans used by the Netherlands and Denmark might be a good solution. The article starts with the obvious problems with DC plans:
… the individual retiree must function as chief investment officer, pension actuary and risk officer, but with no training in those areas. And each retiree must do this alone, with no pooling of risks or benefits.
CDCs are run by employers like DB plans but the company is not liable for unfunded retirement plans. Assets are managed by professionals acting as fiduciaries hired and overseen by employers who manage money and risk while making actuarial decisions. If funding issues arise for the group, then the company can decide to change vesting schedules, decrease benefits, require greater contribution by employees or even take more risk using an LDI (liability driven Investment) approach.
The hybrid DC plans would be able to deal with the two major risks facing DC plan participants: longevity and market fluctuations (or generation). Not everyone in the pool will live to be 100 but those that do would be covered. People get very conservative approaching and into retirement when their assets are largest, missing out on big gains to avoid a market crash but retirees in the pool would be covered.
A recent study by the Organization of Economic Cooperation and Development indicates that 20 governments have promised $78 trillion in retirement benefits, much unfunded, which is almost twice their national debt. Moving retirement liabilities to individuals not willing, ready and able does not solve the problem, even for employers who think they are off the hook but must deals with higher costs and lower productivity of older workers unable to retire. As Apple once famously told us in their seminal ad, we have to “think differently”. Hybrid CDC plans sound interesting.
