Retirement Guarantees in Voluntary Defined Contribution Plans

John Turner and David Rajnes

Abstract —Defined contribution plans are providing an increasing share of retirement income in a number of countries around the world. With this type of plan, concern has been raised as to the amount of risk that workers bear. One response has been to incorporate rate of return guarantees in the plan design. This article surveys the types of guarantees that have been provided in voluntary defined contribution plans around the world. The prevalence and types of guarantees differ considerably between voluntary and mandatory defined contribution plans. Voluntary plans that provide a rate of return guarantee often guarantee a fixed rate of return, while that is rarely done in mandatory plans. A fixed guarantee set at a level where it is effective provides more protection against downward rate of return fluctuations than a relative guarantee, where the guarantee level fluctuates with an index. Some voluntary defined contribution plans provide a guarantee using an associated defined benefit plan. That approach provides a possible model for countries with a social security system where a mandatory defined contribution plan is combined with a mandatory defined benefit plan.