EUROPE - Defined contribution (DC) pension plans must be collective in future or they will fail, a Dutch asset manager has warned.
Willem van Someren Greve, senior executive vice president at Robeco Asset Management, told delegates at the IFM conference in Geneva today that "taking away the solidarity from any scheme, whether it's DB or DC, will render it totally unfit to cover the known liabilities. Closing existing DB schemes to new young entrants will most certainly harm the benefits of those expecting a regular pension fund in the future."
"If you want to move from one scheme to the other, do it gradually and why not have the DB for up to a certain level of income and the DC scheme for the excess," suggested Van Someren Greve.
"If you do move to a DC scheme, you need to think very carefully about making that a collective scheme. Because excluding an appropriate level of solidarity from any DC scheme will bring much more expense if the pension has to safeguard the individual against longevity risk."
"If that is not done, it means that the general public have been considerably short-changed by lawmakers, regulators and their employers."
Members of Dutch pension funds that had moved from DB to mixed DC schemes in the late 1990s had seen no growth in their pension pot from 2000 to 2006, claimed van Someren Greve. "Yet at that time a lot of employees were extremely keen to move from a DB scheme to DC scheme because they saw their personal wealth increasing, and they all thought they were great investors. Solidarity didn't matter - "It is my money," they said."
Van Someren Greve said pay-as-you-go (PAYG) was still a possible alternative to funded schemes in Europe: "If we agree that provision for old age consumes a certain percentage of GDP and that this percentage may grow in the coming years, and if we also agree that we will see volatility in the security markets, building a securities-based pool is an uncertain base to start paying a fixed, but indexed pension.
"It would be better served by a system which does not depend on share pricesat a certain tone and a rate of fixed income at that same time. Pay-as-you-go, possibly in a more sophisticated form, presents itself as a possible alternative solution."
Peter Damgaard Jensen, chief executive of the PKA pension fund, said that collective DC schemes removed the risks of investment choice by individual members of pension schemes: "One of the reasons why Denmark has mandatory collective schemes is that all the investments are done on a collective basis by professional teams of the funds. So it's not up to the individual to make an investment choice. We have the evidence that the professionals will nearly always beat the individual."
Alan Pickering, senior consultant at Watson Wyatt Investment Consulting said: "We are optimistic about DC and our optimism is based on the idea there is a collective way forward."