Finance Department

 

Date of this Version

2005

Document Type

Article

Citation

Journal of Actuarial Practice 12 (2006), pp. 47-58

Comments

Copyright 2005 Absalom Press

Abstract

Traditional defined benefit plans can be difficult to understand and complex to administer. Hybrid plans (cash balance and pension equity) arose in part to address the former issue, but at a price of greater administrative and litigation risk. I introduce a design for defined benefit pension plans that is easy to communicate to participants, allows for accrual patterns that closely replicate those of the two most common forms of hybrid pension plans, and avoids the controversial nondiscrimination issues that currently trouble sponsors of hybrid plans. The design defines the benefit as a fixed percentage of pay payable over a period of time, which period is built up over a participant's employment. When translated into a lifetime pension commencing at normal retirement age, an interesting pattern of accrual rates develops. Numerical examples and illustrations are provided, along with suggested uses for this type of plan.

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