The last decade has seen tremendous interest in hybrid pension plans in the United States. These plans combine risk sharing between employers and employees with increased incentives for employees to remain in the labour force. Hybrid plans avert many of the key issues with defined contribution plans, such as participant exposure to financial risk, the consequent need for extensive financial education and high administrative costs. Hybrids also help rectify some of the main drawbacks of traditional final salary plans: lack of portability, high incentives to retire early and redistribution towards those whose wage growth is above average.

Over the past 15 to 20 years, many companies have converted their traditional defined benefit plans to cash balance or pension equity plans. In a cash balance plan, the worker's ‘account’ is based on an annual contribution rate for each year of employment, plus accumulating interest on annual contributions. A pension equity plan defines the benefit as a percentage of final average earnings for each year of service under the plan. Both types of plans specify the benefit as a lump sum payable at termination. In contrast, traditional defined benefit plans specify benefits in terms of an annuity payable at retirement. From the employees' perspective, cash balance and pension equity plans look somewhat like defined contribution plans. However, they are funded, administered, and regulated as defined benefit plans.

Many firms that sponsor traditional defined benefit pensions have converted these plans to cash balance plans in the last en years. Cash balance plans in the last ten years combine features of defined benefit and defined contribution plans, and yet their introduction has proven considerably more controversial than has the increasing popularity of defined contribution plans. The goal of this study is to estimate a hierarchy of the influences on the decision of a firm to convert its traditional defined benefit pension plan to a cash balance plan. Our results indicate that cash balance conversions have been undertaken in competitive industries with tight labor markets and thus can be viewed at least in part as a response to better compensate a more mobile labor force. Indeed, many firms appear to increase their pension liabilities through such conversions.

Employers are beginning to search for ways to elicit more labor supply from older adults as the population ages, the ability to work in later life increases, and younger workers become relatively scarce. Many employers are turning to hybrid pension plans, such as cash balance plans and pension equity plans. Whereas traditional defined benefit plans often subsidize workers who retire early and penalize those who remain at work beyond the plan's retirement age, most hybrid plans reward work at older ages. This paper documents the impact of population aging on the labor market and changes over time in work capacity at older ages. It then shows how movement toward hybrid pension plans, among other types of private and public retirement plan reforms and redesigns, can be used to increase work incentives for older adults.

The evolution of hybrid conversions has prompted a number of high-profile legal challenges. In response, policymakers have attempted to force companies transitioning from a traditional DB to a hybrid plan to offer all workers the open-ended choice of remaining in the old DB plan, versus switching to the new hybrid plan. This paper evaluates ‘winners’ and ‘losers’ under these plan conversions and estimates the cost to plan sponsors of such a mandate. We find that mandating choice could increase plan sponsors' pension expenses above their current cost for traditional defined benefit plans. In the end, rising costs of pensions could endanger plan sponsorship altogether. Policymakers seeking to mandate pension choice should take into account these possible undesirable outcomes of such a law.