The Future of Defined Benefit Plans

The recurring theme for May´s Benefit Vertical will be defined benefit plans and their expected longevity. Over the next month, we will touch on different aspects of this overall subject. We welcome feedback and hope you will respond by using the appropriate button "Add Comment" on my blog page.

Let us start by stating the following premise: "The defined benefit pension plan needs to and will survive."

I believe that in the best interests of their employees and thus also inevitably their companies, organizations will have to "Go Back to the Future" and revitalize the defined benefit plan.

My reason is that there are numerous issues with respect to the alternative, the defined contribution plan. Most notable of these issues is putting all the responsibility of making sure the employee contributes sufficiently in the first place, leaves those contributions in the plan, and invests properly for the long term with adoption of appropriate risk. We have all seen what the early part of the 21rst Century has done to many employees´ retirement balances.

But companies will have to design their defined benefit plans differently in the future. They will have to curtail some of those plan features that have driven up costs as the employees´ average age in the workforce increased. The two biggest components of the design responsible for much of these cost escalations have been early retirement provisions and indexing of benefits to deal with the cost of inflation.

When companies have specific needs to give employees incentives to early retirement or want to help their retirees keep face with inflation, they can do so on an ad hoc basis.

It will be only through "Going Back to the Past and then Going to the Future" that your employees will be able to have secure retirement.