Cash Balance Pension Schemes

Traditionally, occupation pension plans are fully funded and based on an architecture either in Defined Benefits (DB) or in Defined Contributions (DC).  In DB, the plan describes the level of pension benefits (generally based on salaries and career duration) and the contributions have then to be actuarially computed. In DC, the plan describes the level of contributions and the benefits are simply generated by the financial accumulation of these contributions. However, hybrid solutions have emerged in the international pension landscape, trying to combine in some sense the logic of DB and of DC. These new kinds of pension schemes have appeared as well for the first pillar (social security) (Notional accounts or NDC for instance) as for occupational pension plans (Cash Balance- CB). The starting idea of CB (which are still fully funded solutions) is similar to DC: The plan describes a level of contribution accrued for each affiliate. Then these notional contributions are accumulated using a notional return (fixed rate or interest rate index defined ex ante) to deliver at retirement the pension benefits. The return is notional because on the asset side, the real financial returns of the pension fund can be different. This discrepancy of returns generates real contributions to be paid by the sponsor, different from the notional contributions allocated to the individual accounts.