BELGIUM - Belgian companies operating defined contribution (DC) schemes could soon face a financial and human resources "nightmare" in managing their ageing workforces, pension consultants say.
Despite many firms switching to straight DC, part of the investment risk was pushed back to the employer when a minimum investment return on DC plans was introduced, strengthening the exiting trend to insure DC plans in arrangements that consist of fixed interest instruments.
However, this trend, added up to real interest rates being at a historic low, might lead to inadequate levels of retirement income by the time employees reach retirement age, says consultancy firm Watson Wyatt.
Hence, "employers could wake up to a human resources nightmare not too far down the road as and when employees come to retire, or, at least, start to see that their dreams of a comfortable retirement will not be realised," said Sven Schroven, a Watson Wyatt consulting actuary in Brussels.
Firms could face difficulties in managing their workforce as employees decide they do not have enough income on which to retire, so look to continue to work.
"While experience is kept within the company, there may not be suitable jobs available for younger employees," the firm said, adding: "An alternative option is to enhance the pension of these employees to a level where they can afford to retire. But as well as setting dangerous precedents, the cash may not be available in any case."
According to Watson Wyatt employers should for instance reconsider the investment strategy and install effective governance to implement a framework and process to monitor whether the excising DC plans still delivers the expected retirement income.
"DC is not a panacea and it does come with many problems and risks of its own," warned Schroven.