DC pension plans should prioritise income risk – experts
NETHERLANDS – Pension funds thinking to switch from defined benefit (DB) to defined contribution (DC) could get the best of both worlds by managing for income risk rather than investment risk, according to Jan Snippe.
The pensions adviser at Dimensional Retirement Europe, speaking at a conference held by employers' organisation AWVN, said DC investment management could take into account possible future sources of income, including possible DB rights and "human capital".
He said these additional sources of income would help increase the margin for investment risk in DC plans, although he stressed that investment decisions should not be left to participants.
But he also recommended giving participants more say on their mandatory minimum pensions by giving them more options on increased saving, later retirement or increased investment risk.
In Snippe's opinion, the administration of such tailor-made DC plans would still be "relatively easy".
Leon Mooijman, head of AWVN's advisory team on pensions, underlined the importance of developing a "solid vision" on the issue before taking any decisions on new pensions arrangements.
Marco Robben, partner at Mastermind, agreed, adding: "Firstly, know what you want and subsequently make sure providers can deliver what they promise."
Also during the event, AWVN's Willem van de Rotte urged employers to use the pending changes in the pensions legislation to drop "expensive and complicated" transitional arrangements for early retirement.
These arrangements, he said, caused workers to be more "inflexible" and increased the cost of pension provision by as much as 30%.
"Moreover, these transitional schemes are hardly appreciated by workers," he said.
AWVN's Mooijman had already noted that at least 80% of workers in an early retirement plan had decided to keep on working, earning approximately 180% of their salary as a result.
He argued that employers should compensate their staff for the government plans to limit the tax-facilitated pensions accrual to a salary of €100,000 and decrease the yearly pensions accrual.
He also suggested employers' pensions cost could be decreased by returning at least a part of the contribution to the employer.