The DC /DB debate is as lively and as important as ever, but is definitely getting a greater edge to it as more employers move from considering and discussing DC to actually making the move. DC day is in January 2001 for a number of European pension schemes. The issues manager are grappling with are difficult to resolve, with outside factors (not least cost and control) playing an ever dominant if not decisive part in the change over.While defined contribution (DC) may have been the pensions buzzwords of the last few years, it is still very much the young pretender against the patriarchal retirement backbone of defined benefit (DB).
Only 17% of respondents say their fund is solely DC, whilst almost half state they still run exclusively final salary plans. The number of schemes running dual DB/DC fund operations, meanwhile, comes out at around a fifth, whilst hybrid plans appear to be very much in the minority with only a handful of fund managers acknowledging this as the company approach.
Similarly, the majority of funds (52%) say they have made no changes to their plan philosophy during the last five years. This, despite the cacophony of DC noise heard at conferences and in the press in recent times.
A quarter say they have changed, however, and for most this has been the introduction of a new DC arrangement as a top-up or replacement of a closed DB plan.
One fund manager says the change has removed the generality of the scheme’s previous pension promises.
“ We now offer the same pension promise to people in the same employment group because of the better benefits we can then give.”
Another notes the risk limitations the fund can now impose on funding levels through the DC switch.
For most though, any changes have been made due to market or competitive pressures, although one manager notes the internal reality of needing to alter the plan: “By individualising pension benefits you avoid the pressure of promotions due to better benefits.”
Nonetheless, the DC trend is real. Over a third of schemes say they are ‘considering’ a switch to employee responsibility for retirement and around 20% say this is something they are ‘definitely’ in the process of developing.
Many are well into the changeover - announcing transformations by the start of 2001, with the remainder noting that it is a project that will take a couple of years to implement from start to finish.
And principally the plans are carrying out a straight swop from DB to DC for new joiners, with a number of responses indicating that the new e-commerce culture and an increasingly mobile workforce have been the prime catalysts of change.
A smaller proportion suggest they will be introducing cash balance or ‘stakeholder’ arrangements with a handful switching to hybrid plans or career average benefits as opposed to pure final salary funds.
Still, a third of plans also say they will not carry out any change to their provision in the foreseeable future – so the DB bedrock doesn’t look like being cracked just yet.
For one scheme manager, the question ‘why the transformation’ was met with incredulity: “Are you crazy??? MFR, FRED20, increased longevity, complexity, outlook of reducing returns.”
Apologies there…we were only asking!!
The principal reasons listed were greater competitiveness, increasing investment flexibility, changing employment trends, cost and better premium control.
These views were borne out from a list where managers were asked to denote from one to 12 the importance that certain issues have when a fund is examining the issue of DC.
Of prime concern is the control of costs, with the vast majority placing this at the head of their lists. Only one generous fund felt this was the least of their concerns!
In importance order, the aggregated list runs next to the possibility of tailoring the scheme better to the needs of the sponsor and then to the avoidance of DB liabilities (impressive honesty here we feel).
Reduction of costs comes in next, followed by the needs of a mobile workforce and then the proposition that DC is just easier for employees to understand than DB.
Further down the list - at number seven - comes the statement that DC makes pensions a more appreciated benefit by the workforce with the increase of members responsibility hard on its heels.
At the back end of the choices ‘employees want it’ runs in tenth, with higher pension yield and ‘it’s just flavour of the month’ coming eleventh and twelfth respectively.
In terms of control over the selection of investments that plan sponsors should have in pensions arrangements – responses vary. Some fund managers feel they should have complete autonomy, whilst others believe they ought to have very little.
One manager notes that only the “moral responsibility” should at least lie with the employer.
On the whole though, most parties feel the sponsor should be responsible for provision of a range of investment funds – tending towards rather conservative options - at the best possible rates for their members, and allow the workers to take the reins from there.
As for permitting individual members to take fuller control of their investment options and make asset allocation decisions and moves – only 22% of you believe that is wise - and every one stipulates the need for education beforehand.
The general feeling is that such choices would be too difficult: “ It depends on the employee category and their educational background. This can vary amongst geographic locations and types of business. With proper communication and training, most employee groups should be able to cope. It would be irresponsible of an employer to offer multiple investment choice without adequate communication and training materials, “ comments one manager – summing up the thoughts of many.
Others appear to believe Europeans incapable of the involvement of US employees: “ We should only allow these decisions to be taken in the US, not in Europe.” One brings the question to a fitting close: “NO! Employees should not make these decisions….not even fund managers can do that.”
Similarly, opinion is divided roughly equally on whether DC plans should be offered to particular groups of employees only. Forty-eight per cent say ‘yes’, with particular segments listed including younger, more mobile employees, the better educated and managers or more generally ‘white collar’ workers.
Asked about suitable contribution levels, over 30% select levels of between 10 and 15 per cent as reasonable amounts – with only a few funds going above or below this bracket.
However, while many funds see the attractiveness of DC – the dangers are all too well known.
Half of you feel there is a danger that the resultant pension benefits from a DC plan at retirement could be too little – placing the onus on employers to meet the shortfall.
“ There will be unavoidable pressure to do this if the investment status is very poor at retirement, “ says one.
Others disagree, with one manager opining: “ This is a fallacy. People change jobs – they don’t blame their last employer because their pension is too small.”
The halfway-house is given by one manager: “ There is a danger here, so it is important to communicate clearly that the promise is to pay certain contributions and that the employee has responsibility for the outcome.”
Another manager cuts to the quick on what they feel is the true reason behind the advent of DC: “This is purely for cost-cutting reasons. Let’s not kid ourselves into believing the industry publicity.” IPE