PensionReforms' summary and comments

In the United States, the change in the style of Tier 2 retirement saving scheme coverage has been dramatic.  Over the 24 years 1980 to 2004, coverage has switched from 60% defined benefit (DB) and 17% defined contribution (DC) in 1980 to 11% DB/61% DC.  A small group that have both (about one quarter) has stayed relatively constant.

There have been a number of explanations for this switch including the increased regulation of DB schemes, tougher accounting standards, the inherently uncertain nature of financial commitments by employers to DB schemes and complexity.  Another, looked at in this paper, is the increased job mobility of employees.  The trouble was the absence of evidence for that.  At the time that this dramatic shift was happening, job tenure seemingly wasn't decreasing.  Studies showed conflicting results.

This paper suggests that before 1990, "the median years of tenure for both males and females are virtually flat for every age group..[B]eginning in 1990, after a decade of401(k) plans, the median tenure for men at older ages starts to decline."

Another view of the data looks at employees who belong to DB and DC schemes and compares the tenure of members in the years to retirement.  The conclusion was that from the early 1990s, "male workers in their fifties appear to be shifting jobs more in a 401(k) world than they did when covered by defined benefit plans."  That's expected because, once DC benefits are fully vested, there is no loss of value by moving - not so with DB schemes.

Median years of tenure are susceptible to variability caused by immigrant flows so the paper looked at retention rates for older male workers and found they "were significantly lower in 1996-2000 than in 1983-1987."

Finally, the paper looked at job tenure by type of scheme and discovered that: "people with pensions of any sort have longer tenure that those without and the increase in tenure varies by type of plan.  Coverage under a defined benefit plan raises tenure by 4.0 years compared with no pension coverage; under both a defined benefit and defined contribution plan by 5.8 years and under a defined contribution plan by only 2.7 years."  This, says the paper, suggests that "the reduction in tenure between 1998 and 2003 and the shift in coverage from defined benefit to defined contribution plans are related."

"Commentators should delete increased mobility from their list of reasons for the shift to 401(k) plans. .. It is impossible to prove that the shift in coverage caused the increased mobility, but it appears that the egg came first, then the chicken."

PensionReforms notes that Tier 2 coverage is somewhat less than half, having increased from only 37.6% in 1987 to 41.9% in 2004 (EBRI data reported here) so it would be interesting to understand what was happening with mobility, tenure and retention data with the rest of the workforce.  Those who belong to DC schemes are now only a little over a quarter of the work force. 

Given that the design of Tier 2 schemes is driven by employers, it's always possible that employers wanted older workers to be more mobile.  The switch to DC Tier 2 schemes might therefore have been driven by employers' collective wish to avoid the redundancy costs of forced terminations at older ages.  In PensionReforms' experience, employees don't understand the value of DB schemes and have themselves probably welcomed the move to DC, even if that left them worse off in the long run.  A "win/win"?  Perhaps; perhaps not.   89