US - Mercer Human Resource Consulting has introduced a new pension arrangement in the US similar to so-called variable benefit plans.
It said the Retirement Shares Plan is similar to the little-known variable benefit type of defined benefit plan – which it said have “prospered in some organizations but never come into widespread use”.
The consulting firm said current economic conditions and new technology “make the timing right” for the new idea. Under the schemes, benefits are based on allocating units, rather than cash, to the contributions to the plan. At retirement, the value of the units allocated to the retiring employee are proportionate to the value of all units in the fund.
"The Retirement Shares Plan is a great new concept that we think employers and employees will embrace," said Asghar Alam, head of Mercer's US retirement business.
"It offers the employee the security of post-retirement income and the potential to grow with equity markets and to receive inflation protection.”
Alam added the plan offers firms with stable and predictable costs “without the prospects of large unfunded pension liabilities or unpredictable costs”.
“Employers contemplating moving to an all defined contribution approach should pause and consider the Retirement Shares Plan."
Mercer explained that employees earn retirement shares in the same manner as in a career-accumulation pension plan. A typical plan provides a benefit formula of 1% of pay each year. At the end of the year, the 1% of pay is used to buy Retirement Shares at their end-of-the-year value. The share value is determined based on the value of the retirement trust assets.
Mercer added that unfunded liabilities are minimized as liabilities and assets are always matched.
“The company funds the benefits earned by participants each year and the plan stays essentially fully funded at all times. Modest gains or losses can develop due to demographic experience, but these are typically quite small.”