UK - More than a third of schemes have made either partial or complete moves from defined benefit provision in the last five years, a survey shows.
But Aon Consulting's study warns that the extra administration and communication costs of running defined contribution plans may make them more expensive than final salary schemes.
The survey of 160 consultants - published in Aon’s spring Compass bulletin - revealed that cost savings were the main reason for schemes looking to switch from DB to DC provision.
But Aon principal and actuary Paul McGlone, the author of the report, said: “In some circumstances, where there is an influx of younger staff into the business, a new DC scheme might actually cost more than the old DB scheme.”
A major factor in adding cost was the larger role schemes have to play in helping members make informed decisions such as identifying which asset class or pool fund is suitable.
Aon principal Jenny Ward said that employers may require a significantly greater commitment to communication than with a DB scheme.
Mercer Human Resource Consulting European partner Matthew Demwell said: “If you take an employer-sponsored DB pension scheme, you can take a long term investment strategy. Whether the pension expense is too great compared to the company’s profitability to maximise returns in the long term can be measured.
“Under DC you are not benefiting from mutuality between different members.”
Other consultants also believe that DC could pose legal problems for firms.
Lane Clark & Peacock partner Michael Cranfield said: “The issue of communication is a storm waiting to happen because a number of schemes haven’t told members the difference between DB and DC schemes and they could easily come under fire in a lawsuit.”
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