UK - The variable outcomes of defined contribution schemes is detrimental and could lead to further changes in the pension plan market, new research from Hewitt has found.
The Hewitt Associates report, “Risk Sharing and Hybrid Pension Plans: UK and International Experience”, was commissioned by the Department for Work and Pensions (DWP) to examine factors leading to the adoption of risk sharing pension plans and prospects for the growth of these hybrid structures in the UK.
Kevin Wesbroom (pictured), senior pensions consultant, Hewitt, who co-authored the study with Tim Reay, said: “Whilst we do not expect the growth of these hybrid schemes to be as dramatic as the global trend to DC plans, there are signs the extremely variable outcomes inherent in DC plans are detrimental and more changes will take place in the market.
“These include the fact some sponsors will be reluctant to pass on the investment risk to employees and so will offer career average, cash balance or combination plans instead.
“This could lead to a more balanced sharing of risk between sponsor and employee. Alternatively, concerns about the susceptibility of members’ retirement dates to market conditions may persuade DC sponsors to take on limited amounts of pension risk.”
The report was one of a series commissioned by the DWP to compare risk sharing and hybrid plans with traditional DB and DC plans.
Hewitt noted an increased UK interest in cash balance or retirement balance plans which provide middle-ground solutions to the problems of funding occupational pensions.
Hewitt has suggested risks could be shared between the sponsor and individual to deliver attractive benefits for employees while still remaining affordable and durable for employers.
Wesbroom added: “It must be considered whether the variability of DC plans is acting as a disincentive and that individuals are being discouraged from saving sufficiently for their own retirement.
“The moves away from the polarised scheme designs of pure final salary and pure DC looks set to continue.”
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