Rate of return guarantees for mandatory defined contribution plans

John A. Turner and David M. Rajnes

International Social Security Review, 2001, vol. 54, issue 4, 49-66

Abstract: Many mandatory defined contribution systems provide a rate of return guarantee. The guarantees provided have generally been backed by a sequential combination of two or more of six different financing sources. Those sources are (1) reserve funds established within the pension fund, using investment earnings on the fund; (2) reserve funds established using funds provided by the owners of the pension fund management companies; (3) a defined benefit plan associated with the defined contribution plan; (4) central guarantee funds financed by contributions from pension funds; (5) funds provided by employers; and (6) the government. Nearly all the guarantees are first backed by a limited liability guarantee derived from investment earnings that would otherwise accrue to workers. In some instances, the guarantee may be funded by employers. Then they are backed by a guarantee financed by capital market institutions — pension fund managers directly or a central guarantee fund. Lastly, they are backed by an unfunded governmental guarantee with unlimited liability that is contingent on the insufficiency of private sector guarantees.

Date: 2001
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