FAIR TRANSITION FROM DEFINED BENEFIT TO TARGET BENEFIT

Xiaobai Zhu, Mary Hardy and David Saunders

ASTIN Bulletin, 2021, vol. 51, issue 3, 873-904

Abstract: Target benefit (TB) plans that incorporate intergenerational risk sharing have been demonstrated to be welfare improving over the long term. However, there has been little discussion of the short-term benefits for members in a defined benefit (DB) plan that is transitioning to TB. In this paper, we adopt a two-step approach that is designed to ensure the long-term sustainability of the new plan, without unduly sacrificing the benefit security of current retirees. We propose a cohort-based transition plan for reducing intergenerational inequity. Our study is based on simulations using an economic scenario generator with some theoretical results under simplified settings.

Date: 2021
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