A hybrid pension can benefit both employer and employees by sharing risk more equitably, allowing for greater performance gains and less volatile investment outcomes.
A paper entitled ‘The Third Way: A hybrid model for pensions’ by 300 Club member David Villa says that the model has been tried for three decades in the US state of Wisconsin and it creates a better balance of risk between the employer and employee.
The result, according to Villa, is an improved governance model and that is less susceptible to assumption errors and large shocks, lowering the volatility for savers.
Villa argues that the hybrid model is preferable to employees because it reduces the amount of risk they must assume versus defined contribution (DC) models and also reduces the volatility in their pension provision versus defined benefit (DB) schemes in exchange for assuming some of the risk.
Society is also a winner under the hybrid model, Villa argues. “Society would also be better off if we can avoid going off the DC cliff, wherein financially unsophisticated individuals take on large risks that significantly change their wealth in retirement if they get it wrong,” he says.
He adds that if someone with a DC plan experiences extreme value destruction, society bears the cost by providing a social safety net, this is also true when a defined benefit plan is reduced by a large enough percentage due to poor governance.
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