OECD lessons from the crisis: Second thoughts about DCs and pension surpluses?

Posted: August 30, 2010   By: Pierre Habbard Category: Pension benefits,

A new OECD pension working paper on the lessons from the crisis was published end of July: Defined benefit pension schemes and counter-cyclical pension funding regulations. The paper covers a wide range of plan design: from pure US/UK-style defined benefit (DB) schemes, to Dutch ‘risk-sharing’ DBs and Danish hybrid defined contribution (DC) schemes. Among the recommendations, the OECD staff call for “flexible funding rules” in order to build up buffers in good economic times and to “avoid excessive reliance on current market values for purposes of determining contributions” (an allusion to the current review of the IASB accounting standard for pension liabilities).

But the most telling part of the paper is with the contentious issue of employer’s access to pension fund surpluses. As late as early 2008, OECD experts deplored that the “balanced equation [had] collapsed” in situation in which “employers cannot recover the surplus accumulated in pension plans” which “creates an asymmetrical situation whereby employers bear downside risk but have no or little upside potential”. “Strict funding requirements and the withdrawal of the right to excess assets (or surplus) have [..] raised the financing costs to employers and greatly reduced the upside potential”. In the paper released this summer, the same experts state that “in order to enhance benefit security, regulations should strictly limit plan sponsors’ access to the surplus”. 

Similar policy change can be observed with regard to the DB versus DC discussions. Historically the dominant view within the OECD has been to promote DC schemes because of their considerable attraction for employers. In 2004 OECD experts praised the shift in the US from DB to DC schemes (individualised ‘401k’ plans) as a “valuable experience” to be followed by “other countries in transition from DB to DC”. In 2008 however, the OECD acknowledged that “the problems of going to th[e] extreme and implementing pure DC plans are now becoming clear”, as “the cracks are beginning to show”. In 2009, it was even acknowledged that the crisis had served “a severe blow to members of DC plans close to retirement, denting confidence in many DC systems” and admitted that setting guarantees for DC accounts “may help”.

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