(UBS Pensions series 26) Defined Benefit or Defined Contribution? An Empirical Study of Pension Choices

Joao F. Cocco and Paula Lopes ()

FMG Discussion Papers from Financial Markets Group

Abstract: We empirically study individual pension choice between two di.erent defined benefit (DB) plans and a defined contribution (DC) plan. The DB plans differ in their contribution rates and in the way retirement benefits are calculated, as a proportion of final salary or as a proportion of lifetime earnings. We relate labor income characteristics to the choice of pension plan. Among other determinants of pension choice, we find that: (i) individuals who face higher income growth are more likely to choose DB final salary plans, and less likely to choose the DC plan; (ii) individuals who face higher earnings volatility are less likely to choose DB final salary plans; (iii) individuals with higher earnings are more likely to choose either the DC or the DB final salary plan. These results constitute evidence of self selection of individuals into different pension plans, an important issue for pension fund providers and for those involved in pension reform.

Date: 2004-07
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