DC plans need better design – actuaries
EUROPE - Defined contribution plans need risk mitigating features in order to banish their image as a "poor cousin" of defined benefit plans, attendees at the conference of the Groupe Consultatif, the European umbrella organisation of national actuarial associations, were told last week.
"There is no reason why defined contribution (DC) schemes should not provide the same level of benefits as defined benefit (DB) schemes but there were some design flaws in several defined contribution schemes, earning them the reputation of being a poor cousin of defined benefit schemes," noted Ken Forman, member of the Groupe Consultatif's DC working group.
He added that DB schemes were changing, while getting less generous.
One of the design flaws of DC plans are flat contributions throughout a person's working life - instead there should be possibilities to make increased contributions, and people should be more flexible to change payment plans or retire later when their own or external circumstances change.
Life-cycle pension plans were a good idea, although some in the US had not been designed well and were invested in corporate rather than government bonds near retirement.
"The risks were not fully understood by those who purchased the products and maybe not by those who managed them - maybe there is a role for actuaries to say how these plans should be designed," said Forman.
"Young people should be prepared to accept investment risk," he added and pointed out the need for products that helped mitigate the transition risk between the accumulation stage and retirement.
Risk mitigation can also be achieved by annuitising at some point, but annuities have a bad reputation so people should be educated on the benefits, Forman noted.
"And investment linked annuities are so complicated that there is no market for them - but there might be an opportunity for a simple product that links an annuity to equities, at least for some part of retirement."
The Groupe Consultatif's working group also suggests money-back guarantees in new annuity products as "people are attracted by these guarantees in other product fields" and they would help raise confidence in annuities.
Furthermore, people should be made aware of the risks of DC plans and realistic assumptions on returns should be made.