UK – Watson Wyatt says risk-sharing is the fastest growing type of pension scheme design – and that many more employers will consider this option in the coming years.
It said that while switching from final salary to defined contribution for new entrants remains the most popular choice, “the most interesting trend has been the increase in risk-sharing pension scheme designs”.
“Albeit from a low base, this type of pension scheme has been the fastest growing over the past two years, and the firm believes many more employers may well consider this option over the next few years,” the consulting firm said in a release.
It has surveyed more than 200 UK pension schemes and found that of those employers who had final salary pension schemes open to new entrants two years ago that 30% had closed them to new entrants and introduced defined contribution arrangements.
Eight percent had closed them to new entrants and introduced career average or cash balance arrangements. Sixteen percent had kept them open to new entrants but reduced benefits or increased member contributions. And 46% had made no changes and the final salary scheme remained open to new entrants
"The pace of change to employer-sponsored pensions has been incredibly fast," said Watson partner Colin Singer.
"But while the well-documented trend away from final salary pensions and towards defined contribution continues, perhaps the more significant finding is the number of employers who are moving to alternative, risk-sharing designs such as career average and cash balance.
“Just two percent of employers offered either a career average or cash balance plan in our 2002 survey but this has grown to six percent in 2004.
“Our research also found that while the benefits under these plans are typically less generous than those under final salary schemes they are popular with employees, with 80% of employees eligible to join doing so compared with 65% under defined contribution plans."