Assesssing The Impact Of Pension Scheme Conversion From Defined Benefit To Defined Contribution

Abstract

The KNEC pension scheme is under management by a private administrator. Like all such administrators, Liberty Pensions ltd is under bidding of the sponsor to adopt the new pension plan for and on behalf of KNEC. It is known that private pensions are not generally actuarially neutral. To the contrary, an important function of pension plans is to structure benefits so as to induce employees to exit the organization at a time consistent with the employer’s preferences. The organization is posited to have a target retirement date when the value of compensation paid to the employee equals the value of the employee’s productivity in the organization. On the other hand, the employees are posited to select their desired retirement dates by maximizing remaining lifetime utility, as a function of consumption and retirement leisure, subject to time and money constraints. The time constraint recognizes the finiteness of the employee’s expected remaining lifetime. The money constraint however, is determined by labour market earnings for as long as employment continues and by pensions and social security after retirement. This study therefore shall assess the income-effect impact on the employees due to the revised contribution scheme. At the same time, the study will find out if there was another option for KNEC employees to choose another pension plan without being seen to contradict the government position.