US - A new study finds New York City's defined benefit (DB) pension plans can deliver the same retirement income as a defined contribution (DC) plan at almost 40% less costs.
The report, A Better Bang for New York City's Buck found that DB savings come from three main sources: superior investment returns, better management of longevity risk and portfolio diversification.
The study was carried out by the National Institute on Retirement Security (NIRS) and Pension Trustee Advisors (PTA) on behalf of the New York City Comptroller John Liu using data from the five New York City retirement systems. The analysis shows that for workers in the DB plans that were studied, the cost to deliver the same level of retirement income ranges from 36% to 38% lower than the cost of a DC plan.
Report author and president of PTA, William Fornia said: "Our model makes an ‘apples to apples' calculation of the actual dollar contributions required for a DB and DC plan to achieve the same target retirement benefit,"
"The efficiencies of DB plans already are well documented. This report quantifies the magnitude of those efficiencies in New York City."
Speaking to Global Pensions, Fornia said: "What I'm concerned about is that the reduced DC costs will result in reduced benefits. If governments try to switch from DB to DC in order to save money, they [the employees] will have a bigger cut in benefits."
NIRS executive director Diane Oakley said: "The analysis clearly indicates that the qualities inherent in DB plans - particularly the superior investment returns and pooling of risks and assets - fuel their fiscal efficiency. The report provides important insight for policymakers, employers and employees, who are struggling to ensure adequate retirement income with the fewest dollars possible."
The study finds the pooled nature of assets in a defined benefit plan result in higher investment returns, partly based on the lower fees that stem from economies of scale, but also because the assets are professionally, not individually, managed.
The study estimates that a DC fund is at a 100 basis points (BP) net disadvantage annually compared to DB fund because of individual account balance recordkeeping, transaction costs for individual investment decisions and individual investor education costs.