UK - A rise in the development of defined contribution (DC) schemes will trigger more government intervention and this will in turn increase costs, consultancy firm Mercer has predicted.

Employers seeking to avoid high costs and government intervention by switching from defined benefit (DB) schemes to DC schemes will face similar problems in the future, Deborah Cooper, senior research actuary at Mercer, stated in a contribution to a Pensions Policy Institute (PPI) paper on DB schemes.

"Increased reliance on DC provision will also make more apparent the risks employees face in having to rely on financial markets," she stated.

"Managing these risks whilst complying with more regulatory intervention will increase the cost of DC provision so that its attraction for employers, relative to defined benefit design, should decrease."

According to Cooper, the increased regulatory burden on DC schemes will be fuelled by the decreasing level of state-provided retirement income and the set-up of Personal Accounts from 2012.

She therefore predicts there will be an increase in the creation of hybrid schemes, where the risk is shared between employers and employees.

For the last three years, the interest in hybrid schemes has remained low, a new research by the Confederation of British Industry (CBI) and Watson Wyatt shows.

"The proportion of new employees with access to such schemes remains the same as in 2004 at 3%," the study noted.

"One reason for this is that hybrid schemes carry all of the regulatory burdens associated with DB schemes even though the extent of the pension promise is less."

When asked how they would deal with rising pension costs, 57% of employers surveyed stated they pass on the costs to customers.

Only 10% chose the option of closing any work-related pension plans and offering employer contribution through the Personal Accounts scheme.

Both surveys noted pension scheme buyouts are still uncommon albeit an increase is predicted. However, high costs remain the main obstacle to the buy-out of a pension scheme.

In the CBI survey, 22% of the 246 employer respondents said they would "consider paying an insurance company to take on some or all of their pension liabilities".

This option was more popular with smaller than with larger companies. And researchers added the high costs involved might mean "that in practice it would not be viable for many employers".

Another issue mentioned in both studies is the increasing difficulty of recruiting trustees. CBI and Watson Wyatt found this was especially a problem for small companies while large firms said the most difficult issues were negotiation with the trustees on recovery plans and scheme funding.

Trustees themselves find it hardest to cope with legal and investment issues.

A survey by Hymans Robertson conducted among 157 pension scheme trustees found over half of them (54%) saw their biggest challenge as keeping abreast of legislative issues and more than a third (34%) named investment decisions as the most difficult issue.