Pension design and risk sharing : mixed solutions between defined benefit and defined contribution for public pension schemes

In classical pension design, there are essentially two kinds of pension schemes: Defined Benefit (DB) and Defined Contribution (DC) plans. Each scheme corresponds to a different philosophy of spreading risk between the stakeholders: in a DB, the main risks are taken by the organizer of the plan, while in a DC, the affiliates must bear all the risks. Especially when applied to social security pension systems, this traditional view can in both cases lead to unfair intergenerational equilibrium. The purpose of this chapter is to present alternative architectures based on a mix between DB and DC in order to achieve both financial sustainability and social adequacy. An example of this approach is the so-called Musgrave rule, but other risk-sharing approaches will be developed in a pay-as-you-go philosophy. These principles will be illustrated by the Belgian proposition of reform of the first pillar, based on a points system with a simultaneous automatic adaptation mechanism of the retirement age, the contribution rate, the replacement rate, and the indexation rate.