Lessons from Efforts to Manage the Shift of Pensions to Defined Contribution Plans in the United States, Australia, and the United Kingdom

• Author: Elizabeth F. Brown
• Date: 01 June 2016
• Published date: 01 June 2016
• DOI: http://doi.org/10.1111/ablj.12079

Lessons from Efforts to Manage the

Shift of Pensions to Defined

Contribution Plans in the United

States, Australia, and the United

Kingdom

Elizabeth F. Brown*

INTRODUCTION

Pensions have played an important role in the f‌inancial sectors of the

United States, Australia, and the United Kingdom. Assets held in pen-

sions were roughly equivalent to two-thirds or more of their annual

gross domestic product (GDP), as illustrated in Figure 1.

1

In addition,

the United States, Australia, and the United Kingdom held over eighty

percent of the total f‌inancial assets invested in funded pensions among

the Organisation for Economic Co-operation and Development (OECD)

countries.

2

*Associate Professor of Business Law, College of Business Administration, University of

Wisconsin–La Crosse; J.D., 1994, University of Chicago School of Law; M.A., 1987, Johns

Hopkins University Nitze School of Advanced International Studies; B.A., 1985, College of

William and Mary. Research stipends from the J. Mack Robinson College of Business at

Georgia State University were of assistance in the preparation of this article. The author

would also like to gratefully acknowledge the research assistance of Georgia State Univer-

sity graduate students Matt Horvath, Michael Magnan, Matt Cantor, and Kimberly Rho-

des. This article reflects the information available on this topic as of Dec. 12, 2015.

1

Funded Pensions Indicators, OECD.STAT, http://stats.oecd.org/Index.aspx?DatasetCode5

PNNI_NEW (last visited Dec. 12, 2015).

2

See John Broadbent et al., The Shift from Def‌ined Benef‌it to Def‌ined Contribution Pen-

sion Plans—Implications for Asset Allocation and Risk Management 49 app.1 (Dec. 2006),

http://www.bis.org/publ/wgpapers/cgfs27broadbent3.pdf.

V

C2016 The Author

American Business Law Journal V

C2016 Academy of Legal Studies in Business

315

American Business Law Journal

Volume 53, Issue 2, 315–382, Summer 2016

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Pensions in these countries generally f‌it within the three-pillar frame-

work that the World Bank articulated in 1994.

4

The pillars include the

following: a publicly managed pension system that requires mandatory

participation from all members of society but is only aimed at alleviating

poverty, not providing a comfortable retirement (Pillar I); a privately

managed pension system that ideally would cover all members of society

(Pillar II); and voluntary savings by individuals (Pillar III).

5

This article focuses on private pensions, which f‌it within Pillar II of

the World Bank’s scheme. Private pensions rose in importance in the

economies of the United States, Australia, and the United Kingdom

over the past 150 years.

6

For much of that period, however, the def‌ined

benef‌it plan was the dominant type of private pension.

7

A def‌ined bene-

f‌it plan is a pension plan offered by an employer to an employee under

which the employer makes contributions to the plan and the plan guar-

FIGURE 1. Financial Assets Held in Pensions as a Percentage of GDP from 2001–2012.

3

3

Funded Pensions Indicators,supra note 1.

4

WORLD BANK,AVERTING THE OLD AGE CRISIS:POLICIES TO PROTECT THE OLD AND PROMOTE

GROWTH 10 (1994).

5

Id. at 15–16.

6

See infra Part I.

7

See id.

316 Vol. 53 / American Business Law Journal

antees to pay the employee a specif‌ic benef‌it upon retirement.

8

Usually,

the benef‌it conferred on the employee is an annuity

9

from the date of

the employee’s retirement from the employer or from the date on

which the employee turns a particular age (e.g., f‌ifty-f‌ive, sixty, or sixty-

f‌ive), until the date of the employee’s death. Sometimes a def‌ined bene-

f‌it plan will pay an employee a lump sum upon retirement rather than

paying an annuity. Some def‌ined benef‌it plans provide additional bene-

f‌its, such as health care, in connection with the annuity.

In order to meet such obligations, the employer will provide a certain

amount of money annually to the pension plan to invest with the expec-

tation that the invested funds will grow suff‌iciently to cover the future

pension obligations. Normally, def‌ined benef‌it pension plans invest in a

variety of assets, although a large percentage of them are invested in

f‌inancial products such as stocks, bonds, commodities, and derivatives.

Under a def‌ined benef‌it plan, the employer and the pension plan face

the risk that employees will live longer than originally calculated using

actuarial data and that the pension plan funds will not be suff‌icient to

cover the employer’s and the pension plan’s obligations to the

employee.

Within the last thirty years, however, def‌ined contribution plans

have risen in importance and are displacing def‌ined benef‌it plans.

Def‌ined contribution plans are pension plans under which an individ-

ual, the employer, or both, make contributions to the individual’s

account under the plan.

10

The funds in the account generally are

invested in mutual funds or similar f‌inancial products. The employee

is entitled to the net amount in the account, which would equal the

employee’s contributions plus or minus the gains or losses from the

account’s investments.

8

See 29 U.S.C § 1002(35) (2012) (def‌ining “def‌ined benef‌it plan” under U.S. federal law).

9

An annuity is the payment of a f‌ixed sum of money to an individual each year, usually for

the rest of his life. In the case of most def‌ined benef‌it plans, the annuity payments are

based upon a percentage of an employee’s salary. For example, a company might pay two

percent of an employee’s f‌inal salary for each year that the employee worked for the com-

pany. Thus, an employee who worked for the company for twenty years and whose salary

in his last year with the company was U.S. $50,000 would receive annual pension pay-

ments of U.S. $20,000 from the date of his retirement for the rest of his life.

10

See 29 U.S.C § 1002(34) (def‌ining “def‌ined contribution plan” under U.S. federal law).

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