A profit Sharing Pension Plan

Abstract

As Traditional Defined Benefit (DB) plans are declining, more companies are switching to Defined Contribution (DC) plans. However, DC plans have significant disadvantages since employees bear all investment and longevity risk. Hybrid pension plans, lying between DB and DC plans, are designed to meet the needs of both contributors and beneficiaries with better ways of sharing the risks. In this paper, based on the mathematical results from intergenerational risk sharing plans(Hardy et al. (2020)), we design a new profit sharing hybrid pension plan. We compare the solvency, contributions, and benefits between new hybrid plan with the traditional DB plan. We find that the new hybrid design can better manage the volatility of contributions, and it can offer a guaranteed base income that isn’t provided in traditional DB plan if considering the risk of default. The new hybrid plan also offers some flexibility to balance the preference between benefit security and potential for higher income.