Tale of Two Systems : Winners and Losers When Moving from Defined Benefit to Defined Contribution Pensions

There is a trend among employers to prefer Defined Contribution instead of Defined Benfit pension plans, since the former transfer all risks associated with investment return, longevity, etc from the employer to the employee. However, Defined Contribution plans also allow the individual to enter into positions contingent on the individual situation. This paper investigates the individual welfare consequences of different plans. We used the recent transition from defined benefit to defined contribution for white-collar workers in Sweden as the benchmark for our analysis. The framework for our analysis is a life cycle model of a borrowing - constrained individual's consumption - and portfolio choices in the presence of uncertain labour income. The main result is that individuals with the characteristic of a low expected pre-retirement income relative to average income and high variance in earnings are winners (men with university degree in the private sector), and that those with the opposite characteristic (women with university degree in the public sector) would be losers