The Terms 'DB' And 'DC' Are Barriers To Pension Innovation: Time To Stop Using Them

“Netherlands announces pension reform that would move country to a DC system.”

PENSIONS & INVESTMENTSOCTOBER 11, 2017

DC Headline Misleads

The P&I headline cited above set off a vigorous international email exchange that may be summarized as follows:

• Question: “What on earth are the Dutch doing replacing their workplace DB pensions with DC plans?”
• Answer: “Actually, they’re not really doing that. First, their current plans are not really DB…..and second, the intent is not really to move them to DC.”

This exchange is only the latest example of people (and not just the media) misusing the DB and DC terms to describe different types of workplace pension plan designs.

Two other recent examples come to mind:

• Public relation efforts by coalitions of North American public sector pension organizations to defend the DB model despite the fact that many of the coalition partner plans are really not DB.
• Australian ‘DC’ super funds are attaching income-for-life back-ends to their traditional accumulation ‘front-ends’, meaning the traditional DC label no longer fits.

I conclude the historical DB and DC labels now confuse rather than explain pension design issues. The time has come to rethink the language we use to describe workplace pension designs, and that is the goal of this Letter. This rethinking will in turn facilitate developing, explaining, and implementing the innovations that workplace pensions so urgently need.