DC switching 'can be costly'
Switching from defined benefit to defined contribution can be a costly exercise if companies don’t weigh up the pros and cons properly, warns Paul McGlone, a principal and actuary at Aon Consulting in London. The news comes at a time when many companies are closing their DB schemes altogether or to new members in favour of DC plans that are perceived to be cheaper.
But McGlone argues this isn’t always the case. “Closing a DB scheme to new entrants will have little impact on costs where staff turnover is low, but a new DC scheme might actually cost more where there is an influx of younger staff,” he says.
McGlone believes that each company’s case is unique and that it should decide whether the pros outweigh the cons before switching. “Understanding that balance is the key to success,” he says.
Furthermore, Aon’s head of communication, Jenny Ward, claims that DC schemes also entail additional communication problems. “The high level of member participation in DC scheme decisions means communication must do more than just deliver information,” she says.
Ward believes that extending the communication boundaries beyond simple information is vital in helping members make informed decisions about identifying the right asset class to invest in or select the right pool fund for their individual circumstances.