The Shift to Hybrid Pensions by U.S. Employers: An Empirical Analysis of Actual Plan Conversions

Sylvester J. Schieber

Abstract — For nearly two decades, employers have been restructuring traditional defined benefit pension plans to look and operate more like defined contribution plans from participants’ perspectives while retaining defined benefit funding characteristics. This shift to cash balance and pension equity plans has become controversial because some participants and outside analysts have concluded the shift to these new plan styles has been primarily motivated by the desire to cut pension costs and reduce benefits. This paper empirically documents the shift from traditional pension forms to these new hybrid forms for a sample of actual plan conversions. The analysis investigates the implications of the plan conversions on plan costs and the levels and distribution of benefits. If finds that some employers did indeed modify their plans to reduce costs but that, on average, cost savings from the shift to hybrid plans have been negligible. The paper documents that some workers will receive smaller benefits under the new plans than they would under the old but shows that most plan sponsors implemented substantial grandfathering or other transition protection to eliminate or limit the effect of the transitions on workers with substantial tenure or age at the time of conversion. The controversial “wear-away” is evaluated against provisions in the prior plans that provided subsidized benefits to early retirees and then reduced them if workers extended their career beyond early retirement eligibility. It finds that wear-away has actually been ameliorated in the shift to hybrid plans although shifted forward in the career in most cases. The paper shows that it is largely the elimination of these early retirement incentives that is at the heart of the shift to hybrid plans. This shift is resulting in new incentives to work beyond early retirement ages and is redistributing benefits more equitably across the total workforce than traditional pensions have done.