Defined-benefit and defined-contribution pension schemes
- Defined-benefit pension schemes
- Defined-contribution pension schemes
- Increasing importance of defined contribution pension schemes
Nowadays pension funds are actors of the financial market that cannot be ignored; for example, the asset traded by these funds represented $29.5 trillion in 2009 and moreover, as stated by David Dodge , "pension funds have already become the largest institutional investors among G-10 countries". However, despite the expansion of these institutional investors, we can ask ourselves a set of questions concerning these financial actors and regarding the services they provide: What is the aim of pension funds? What are the different forms of pension schemes? Who is responsible for the risk in these schemes?
In order to address these questions, we will focus more precisely on the two main types of schemes offered by pension funds: the defined-benefit and the defined-contribution pension scheme. Moreover, in the recent years, an important shift from defined-benefit to defined-contribution plans has emerged. This transfer can be explained by several factors that will be discussed in the third part of this paper.
The first section of this essay highlights the main characteristics of a defined benefit-pension scheme. The subsequent section focuses on another type of pension plan, the defined-contribution pension. The final section copes with the reasons leading to the increasing importance of defined-contribution pension schemes in the last decade.