Reinventing the Risk Sharing Mechanism of Defined Benefit Pension Plans
In this paper, I will introduce several new mechanisms of risk sharing regarding occupational retirement provisions, based on the analysis of present risk sharing between sponsoring employers and plan participants, individual participants and participants as a group, active members and beneficiaries (including deferred members), etc. Among others, I will introduce "Ring-fenced" DB (RfDB) plans, which introduce "share" structure into contributions and reserves, prohibit "lending" from active members to beneficiaries when the plan is in an underfunded status (actuarial deficiency), and allow temporary benefit reductions within prescribed ranges according to the funding level. The risk active members bear will be eased in RfDB plans, and market interest risk sponsoring employers bear will also be eased, because some portion of benefits becomes conditional. RfDB plans allow investments with greater risk tolerance, which may benefit both labor and management from a long-term perspective. It will also be possible to ease funding rules substantially for RfDB plans. It is said that DB plans are on the verge of extinction mainly by the threats from accounting standards. Taking this into account, it is necessary to expand the variation of risk sharing mechanisms in occupational retirement provisions.
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