4.2.1. Pension Plans

Pension funds are traditionally classified between defined contribution (DC) and defined benefit (DB) plans⁷³⁷⁴.

A defined contribution (DC) plan is a pension plan by which benefits to members are based solely on the contributions to the plan (by the sponsor or the member) plus the investment return which is depending on the success of the pension fund’s investments.

A defined benefit (DB) plan is any pension plan other than a defined contribution plan. Benefits to members are typically based on a formula linked to members' wages or salaries and the length of employment.

Illustration 14: Defined benefit vs. Defined contribution pension fund assets in total, selected OECD countries, 2001-2011⁷⁵

Returns to members of DC plans are purely dependent on the market whereas DB plans are overlaid by a guarantee for the rate of return by the sponsor. DB plans have insurance features which are absent in DC plans. These features include guarantees in respect of replacement ratios (pensions as a proportion of income at retirement) which are subject to the risk of bankruptcy of the sponsor, as well as potential for risk sharing between older and younger beneficiaries⁷⁶.

⁷³ Yermo, Juan, REVISED TAXONOMY FOR PENSION PLANS, PENSION FUNDS AND PENSION ENTITIES, OECD 2002
⁷⁴ E Philip Davis, Pension Fund Management and International Investment - A Global Perspective, DIS-CUSSION PAPER PI-0206, The PENSIONS INSTITUTE May 2002
⁷⁵ OECD 2012, Pension Markets in Focus, Issue 9, September 2012
⁷⁶ PORTFOLIO REGULATION OF LIFE INSURANCE COMPANIES AND PENSION FUNDS commissioned by the OECD, E Philip Davis, Brunel University London, p 12