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DC pension schemes can thrive as much as DB funds with 'correct design'

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  • DC pension schemes can thrive as much as DB funds with 'correct design'

EUROPE - The implementation of defined contribution (DC) schemes - assuming they are well designed - should not be about cost reduction but risk control, according to Fidelity International (FIL).

Speaking at the recent World Pension Summit in Amsterdam, Klaus Mössle, managing director at FIL in Germany, said a DC plan could flourish as much as a defined benefit (DB) scheme if companies implemented the right design.

"If a DC plan is not well designed, investment risk - as well as longevity, inflation and legal risks - will rise," Mössle said. "Therefore, companies need to think well in advance how to set up their scheme."

Mössle, who also said that a large number of companies in the US were now looking to develop DC plans, recommended several steps for building a stable DC scheme.

First, the plan should include no annuities but a default solution, as well as combine employer contributions and deferred compensation.

In addition, the scheme should comprise auto-enrolment and auto-increase programmes with opt-out and matching contributions, Mössle said.

He also recommended DC pension schemes limit early access to funds for its contributors and implement a large variety of options during the pay-out phase.

On the investment side, Mössle said DC schemes should also include a life-cycle product as the default solution, as this provides an optimal asset mix for each age group and minimises legal risks for employers. 

The 'Towers Watson Global Pension Asset Study', published earlier this year, showed that the split between DB and DC plans worldwide have continuously shrunk over the years, with 35% of pension funds being DC schemes in 2000 against 44% in 2010. 

In the UK, DB plans still account for 60% of the pensions market, but the trend is expected to change in the coming years as many employers use DC schemes to comply with auto-enrolment legislation from 2012.

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