DC Pension Fund Best-practice Design and Governance

Abstract

The design and governance of pension funds is an important topic of academic research and public policy and has significant implications for the welfare of participants. Here we focus upon the design and governance of defined contribution (DC) pension plans which have become the de facto model of occupational pensions in most countries. The study synthesises the findings of a year-long research project based upon in-depth interviews with the sponsors and managers of leading schemes from around the world. We begin with the dual nature of the governance problem characteristic of DC pension plans, emphasising aspects related to the self-governance of individuals in relation to their long-term interests as well as the ambivalence and conflicts of interest in plan sponsors. With those problems in mind, we focus on the design of DC pension plans and then their governance so as to challenge existing institutions in particular jurisdictions. Our findings have implications for employer-sponsored plans, multi-employer plans, and the public utilities that have been established or proposed that may transcend company-based and industry-based pension institutions. Whereas DC plans were once believed to be simple solutions to burdensome defined benefit liabilities, it is shown that there is nothing simple about a well-designed DC pension plan. In essence, the complexities associated with DB liabilities have been exchanged for complexities in the design and management of DC institutions.

Keywords: Defined contribution pensions, design, governance, best practice

JEL Classification: D01, D02, G23, J32