Defined Beneftis

The Shift from Defined Benefit to Defined Contribution Pension Plans Implications for Asset Allocation and Risk Management

John Broadbent Domestic Markets Department Reserve Bank of Australia Sydney, NSW 2000 Michael Palumbo Division of Research and Statistics Federal Reserve Board 20th and C Streets, NW Washington DC 20551 and Elizabeth Woodman Financial Markets Department Bank of Canada 234 Wellington, Ottawa Ontario K1A 0G9 December 2006

Prepared for a Working Group on Institutional Inve stors, Global Savings and Asset Allocation established by the Committee on the Global Financial System

The analysis and conclusions set forth in this paper are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors or any other officials in the Federal Reserve System or at the Federal Reserve Bank of Australia or at the Bank of Canada.

Contents Executive Summary...........................................................................................................i

I. Introduction ....................................................................................................................1 II. Main Features of Defined Benefit and Defined Contribution Pension Plans and Distribution of Risks ......................................................................................................3 A. Defined Benefit Pension Plans ...................................................................................3 B. Defined Contribution Pension Plans ...........................................................................7 C. Hybrid Pension Plans............................................................................................... 10 III. Extent of the Shift Away From Traditional DB Pension Plans ......................................... 11 A. Within the OECD.................................................................................................... 11 B. Trends in Australia,...