Europe is moving slowly and deliberately away from defined benefit pensions to approaches that, if well considered, might prove a sustainable model for workplace retirement provision.
In many countries, this process is well advanced or nearly complete. The most obvious example is the Netherlands, where a likely outcome of the current process to reform pensions funds is a hybrid form of collective defined contribution, where pensions accruals are conditional on the overall health of the fund.
Danish pension funds are moving away from guarantees to unit-linked defined contribution, in part because of the cost of guarantees in terms of solvency capital, since domestic pension funds are regulated as insurance entities.
Recent UK proposals on hybrid pension models are welcome but are a decade too late. The British private sector started its abandonment of final salary DB in favour of pure defined contribution some 10 years ago or more and the process is now complete.
The UK is an example of how not to run pensions policy over the long term. Successive governments on right and left have taxed pension surpluses and cut dividend tax relief, while benefits in accrual and payment are subject to compulsory (limited) price indexation.
Elsewhere, the debate has moved on from consideration of pensions in accrual to pensions in payment. In the Netherlands, underfunded pensions led to rights cuts, including for pensions in payment, in order to bring pension funds back to financial health. Understandably, the moves have been painful and unpopular.
The current debate in Switzerland on variable pensions is several steps ahead because it introduces an ongoing element of conditionality to pensions in payment. The Swiss pension fund of PwC is at the forefront of this process, and although only a small number of funds are considering the approach, the issue has captured the attention of the industry.
The debate correctly centres around the inter-generational transfers that currently take place in the Swiss second pillar, as younger members effectively subsidise guarantees enjoyed by older members and retirees.
Such processes require diplomacy and a heightened degree of communication to all involved if they are to be successful.
All this assumes that the countries involved wish to retain a collective pensions system; before long, younger contributors may well conclude that an individual DC approach is better for them. An important obstacle at the moment is a lack of generally available information on the merits, or otherwise, of collective versus individual approaches. Those who desire the continuation of collective approaches should not bank on this staying the case for too long.