On the shift from defined benefit to defined contribution pension plans

Abstract

Traditional DB pension plans are gradually losing their dominance in Kenya like many other occupational pension systems of many countries. Over the past few decades there has been a gradual shift towards DC pensions and, in some countries, DC plans now account for the. majority of invested assets in private sector occupational pension plans. The most frequently quoted reasons are: Cost control, in the sense that an employer's obligation to a DC plan can be predicted up front, based on the contribution formula used, easier administration for DC plans, and difficulty in communicating the benefits provided by a DB plan. While all these are legitimate reasons, they are all reasons from an employer's perspective. Traditionally, the employer makes all decisions concerning retirement benefit arrangements. The ultimate choice of benefits often reflects the interest of the employer, even though Employee Retirement Income Security Act and the Pension Benefits Acts stress that retirement plans are solely for the benefit of the employees. DB and DC plans have significantly different characteristics with respect to their cost and the benefits offered to the employees. How well they succeed must be judged in the context of their cost effectiveness and the benefit they provide to the employee. In this paper, we intend to approach the subject from both the perspective of the employee and employer welfare. We shall focus on the cost involved in DB Plan and DC Plan. We will then also compare the values of benefits they will provide to an employee.