Are Automatic Balancing Mechanisms Appropriate for Private Sector Defined Benefit Pension Plans?

Andrews, Doug (2009) Are Automatic Balancing Mechanisms Appropriate for Private Sector Defined Benefit Pension Plans? In, UNSPECIFIED , Society of Actuaries.


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The Swedish social security system contains a mechanism referred to as an
automatic balancing mechanism (ABM) that adjusts the rate credited to
contributor accounts and the amount of increase in pensions in payment when
liabilities exceed assets. The Swedish social security system also includes some
other adjustment features including adjusting annuity factors to reflect, in part,
improvements in cohort mortality and crediting accumulations (and to a certain
extent pensions in payment, as will be explained in the paper) with the rate of
growth in average wage per capita, thus connecting the growth in contributions
and pensions to economic growth. The German social security system adjusts
benefits by a sustainability factor that has been calculated to maintain long‐term
contribution rates within a certain range.
The above description of Sweden’s social security applies to the
component of the system that is Notional Defined Contribution (NDC). The
German system, as it has been modified, could be considered to be quasi NDC.
Mathematically, NDC and career‐average‐earnings defined benefit (DB) plans
are similar.
This paper considers the question of how the adjustment mechanisms
described for the Swedish and German social security systems might be
incorporated into private sector DB plans of the following types: multi‐employer
and single employer. The paper will argue that such adjustment mechanisms
may be appropriate in multi‐employer pension plans and will present innovative
ways in which DB multi‐employer pension plans could incorporate adjustment
mechanisms. However, the paper argues that adjustment mechanisms are
inappropriate in private sector single employer pension plans. The paper does
present a modified approach to designing single employer pension plans that
combines an employer‐paid DB benefit and an employee‐paid contribution
account that would enhance financial sustainability and provide employees with
greater flexibility.

Item Type: Book Section
Related URLs:
Subjects: Q Science > QA Mathematics
Divisions: University Structure - Pre August 2011 > School of Mathematics > Statistics
ePrint ID: 149113
Date Deposited: 30 Apr 2010 10:48
Last Modified: 27 Mar 2014 19:08

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