The ‘crisis’ in defined benefit corporate pension liabilities Part II: Current solutions and future prospects

Abstract

is a PhD candidate at Christ Church College, University of Oxford. His doctoral research focuses on the impact of competitive strategy and globalisation on the design and implementation of corporate benefi t systems. He holds graduate and undergraduate economics degrees from the Sorbonne (Paris I) and Princeton University, respectively.Abstract Once an integral component of company-sponsored compensation schemes in many Western economies, private defi ned benefi t (DB) pensions are in decline. For many, DB schemes (and their related healthcare liabilities, depending on the jurisdiction) have hobbled the fi nancial wellbeing of plan sponsors and even whole sectors of industry. If a constraint on shareholder value in the short term, these schemes threaten long-term corporate survival in the emerging global economy. While there remains considerable debate over the ability of fi nancial markets to adequately price DB liabilities, there is a growing industry devoted to estimating their long-term risks with respect to longevity, infl ation and cost. In part I of this two-part paper, we surveyed the nature and signifi cance of the problem, focusing upon the UK and the US private employer-sponsored plans. We suggested that the ' crisis ' was apparent, for those willing to look, a decade ago. Its signifi cance was papered over by the 1990s stock market bubble and high interest rates but has returned through what many analysts identify as a ' perfect storm ' . Having documented the nature and scope of the ' perfect storm ' , we now evaluate in part II the proffered solutions to the crisis, such as fi nancial engineering, government intervention and private sector negotiation. In the fi nal sections of the paper, we set out the principles that should guide the design of new kinds of employer-sponsored plans noting that if, as suggested by many experts, Western economies are entering an era of increasing labour shortage, private pensions will continue to have an important role in managing human capital.

Retirement systems and pension reform: A Malaysian perspective

“…3 Thus, DB plans continue to dominate the Ontario occupational pension landscape. Clark and Monk (2007) argue that DB plans have hobbled the financial well-being of many pension plan sponsors and even whole industries. This is one of the main reasons why private DB pension plans are in decline in many Western economies; it is indeed generally accepted that DC plans are becoming increasingly popular or dominant globally.…”

Réformes des retraites et pensions en Malaisie

“…tions définies continuent d'être prédominants dans les régimes de pensions professionnels de l'Ontario. Clark et Monk (2007) avancent que les régimes à prestations définies ont porté préjudice à nombre de ceux qui les finançaient, voire à des secteurs d'activité entiers. C'est l'une des principales raisons qui expliquent le déclin des régimes de pensions privés à prestations définies dans de nombreuses économies occidentales.…”

The Potential of Private Institutional Investors for Financing Transport Infrastructure

“…A 'natural' solution to the DB pension crisis would be to carry out a contract renegotiation process with employers, employees, shareholders and taxpayers (Clark and Monk 2007). Government intervention has led to the passing of the US Pension Protection Act and UK Pension Act, which focus on improving the security of plans and protecting the rights of plan beneficiaries at the expense of employers (Hull 2007).…”

“…Government intervention has led to the passing of the US Pension Protection Act and UK Pension Act, which focus on improving the security of plans and protecting the rights of plan beneficiaries at the expense of employers (Hull 2007). Such legislation can be seen to have market distorting effects, increasing regulatory costs on firms and inhibiting the private sector process for reform by prioritising public institutions (Clark and Monk 2007). A large proportion of firms have now closed their DB schemes and set up DC schemes, which do not guarantee the final pension sum and are therefore less risky for companies.…”

“…While renegotiations and government intervention provide possible solutions, novel investment strategies and financial products have been utilised by pension funds and will continue to play an important role for funds moving out of the crisis (Clark and Monk 2007). Some funds will hope that interest rates and asset values will return to higher levels and send plans to a fully funded status without having to increase contributions.…”