The Welfare State As Piggy Bank by Barr Nicholas;

Author:Barr, Nicholas;
Language: eng
Format: epub
Publisher: Oxford University Press, Incorporated
Published: 2001-08-15T00:00:00+00:00

Towards an individual and internationalized world

How might defined-benefit pensions be adapted to a new world?

LABOUR MOBILITY. The only way to ensure that there is no impediment to labour mobility is through full transferability of accrued rights between pension schemes. Thus a person’s pension depends only on his or her earnings record and length of service, but not on the number of job changes. Requiring full transferability between schemes, however, creates problems. If different firms have different pension schemes, an employer with a generous scheme faces a large bill when taking on workers with rights accrued in less generous schemes. The employer might on that account be reluctant to take on such workers, bringing back labour immobility by another route. One way of avoiding the problem is convergence between employer schemes. But one of the major purposes of employer schemes is precisely to enable the firm to attract and retain workers; if a defined-benefit scheme—because pressures make them all similar—cannot achieve that purpose, it is not clear why employers would wish to operate one; in doing so, they face the extra risk of the scheme relative to a defined-contribution scheme, but with none of the advantages. It is not clear that much headway can be made in addressing this problem.

PENSIONS AND FAMILIES. Just as there are non-linearities in dividing pension rights between employers, similarly, there are non-linearities in dividing them between family members. The issue is becoming salient in the UK in respect of accrued defined-benefit pension rights when a couple divorces. If the divorce occurs midway through a career, valuation of the pension accumulation, and hence of (say) the wife’s share, is problematical, because it depends, inter alia, on what happens to the husband’s pay during the second half of his career. An obvious way to deal with this difficulty is to leave the husband’s pension untouched and to divide the pension when it is actually paid. That, however, runs counter to the trends towards ‘clean-break’ divorces, and also raises significant issues of enforcement. Again, there is no easy answer.

PENSIONS IN AN INTERNATIONAL WORLD. Suppose that I move from a UK job with a defined-benefit pension to a similar job in Australia. Again, problems arise over the valuation of my accumulated UK rights. The problem could be solved by transferable rights, but the resulting difficulties, discussed above, are vastly more intractable in an international context.

The conclusion (which I reach with considerable reluctance given their major advantages in terms of certainty) is that private defined-benefit schemes do not fit well with a world of individual entitlements, fluid families, flexible labour markets, and international mobility.

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