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DB 'can still play a role for years to come' despite rise of DC

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Despite a clear trend to the contrary, defined benefit (DB) pension plans will still have a role to play even in 30 to 40 years, German and Austrian pension experts have said.

This was the consensus among delegates at a panel discussion during the Institutional Retirement and Investor Summit in Vienna this week.

Johannes Ziegelbecker, board member at the €700m Austrian Bundespensionskasse for federal employees, said: “I do not think there will be any new DB plans set up within the Pensionskassen but employers will still be using DB in direct pension promises to employees in higher positions.”

Therefore defined benefit obligations might still be added to Austrian companies’ balance sheets decades from now, he said.

Sibylle Kampschulte, senior international consultant at Willis Towers Watson in Vienna, said DB benefits would be used “selectively” by employers to position themselves to attract workers.

However, Ziegelbecker added: “Employees often are not aware of the contributions employers are making to DB plans as only the future pension payout is seen. In defined contribution [DC] plans, the level of contributions is more visible.”

In the German civil servant segment it is exactly this future pension promise which people expect, explained Hagen Hügelschäffer, managing director at the German AKA, the association for supplementary pension systems in the municipal and church sector.

“We are facing a major retirement boom in the public sector and with it a severe shortage of skilled workers,” he said. “As the salary level in the public sector will never be very high, a DB pension promise can be the ‘goody’ to get skilled workers.”

According to the latest collective bargaining agreements, supplementary pensions in the public sector in Germany have to guarantee 3.25% interest during the active phase and 5.25% plus an additional 1% “dynamisation” during the retirement phase.

Hügelschäffer added it would be “impossible to introduce DC to the German public sector”.

The high costs of public sector pensions in Germany were recently found by the think tank ESISC to be one of the major weaknesses of the system. In a briefing, the authors proposed to “erase the privileges of the civil servants”.

A Dutch example

On the panel at the summit in Vienna, Sibylle Reichert, representative of the Dutch pension federation in Brussels, reported on the current debate on a transition to a hybrid pension system.

“The Netherlands is currently moving towards an ‘individual collective DC’ with higher transparency and more security in the pay-out phase,” she said.

She added the long-awaited proposal should be presented “before summer”, by the not-yet-formed new government. Coalition talks are continuing after the general elections in March. 

However, the transition phase from the current DB to the new hybrid system “will take 20 to 30 years,” Reichert said.

“We should end the system debates of DB versus DC as people are only interested in what they can expect in the end,” she said.

But she added: “It has to be a hybrid system because it is an illusion to make promises when we have no idea what happens in 40 years.”

DB’s power remains

Hügelschäffer presented some statistics on the major weight old DB promises still carry in European pensions: “57% of all pension assets in Europe are still in DB systems, while only 9% are pure DC and 34% in hybrid systems. However, looking at occupational pension plans, it shows that only a minority is still DB.”

Overall, the delegates at the conference believed the future lay in DC or hybrid pensions with collective risk taking. In addition, they agreed that communication with members was vital to the success of DC and hybrid plans.

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