Retirement provision in much of the world moved over several decades from employer promises of lifetime income to individual accounts holding invested contributions. The shift looks administrative and is anything but.
The two structures make different promises
A defined benefit arrangement promises an income calculated from salary and years of service. The employer must produce that income whatever the investments return.
A defined contribution arrangement promises only that money will be paid into an account. What the account is worth at retirement depends on contributions, returns and charges.
The first is a liability of the employer, recorded on its balance sheet. The second is an asset of the employee, and the employer's obligation ends when the contribution is made.
Risk moved rather than disappeared
Under the older structure the employer absorbed poor investment returns, since the promised income did not change. It also absorbed the cost of pensioners living longer than expected.
Under the newer structure both risks sit with the individual. A weak market in the years before retirement reduces the balance, and a long life means the same balance must stretch further.
Neither risk became smaller in the transition. They were simply reassigned to parties with far less capacity to pool them.
Accounting and demographics drove the change
Rule changes required pension obligations to be recognised more visibly and measured against market rates, which made the liability move unpredictably on company accounts.
Rising life expectancy increased the size of those obligations at the same time, since a promise of lifetime income becomes more expensive as lifetimes lengthen.
Employers facing a large, volatile and growing liability had strong reason to close these schemes to new members, and most did.
Portability suited a changed labour market
Defined benefit schemes reward long service heavily, because the final calculation depends on years accrued with a single employer.
That structure fitted an economy where careers were spent in one organisation. It penalises the pattern of frequent moves that became normal afterwards.
Individual accounts travel with the worker and keep their value on a job change, which is a genuine advantage of the newer structure and part of why it was accepted.
The decision burden landed on individuals
The older arrangement required no decisions from the employee. Contribution levels, investment choices and income conversion were all handled by the scheme.
The newer one asks each person to choose how much to contribute, how to invest and how to convert a balance into income, each with lasting consequences.
Automatic enrolment and default investment options exist precisely because those decisions proved difficult, and they shape outcomes for the large share of people who never change them.