UK - Hewitt Associates has called for greater innovation in pensions design to overhaul the UK's occupational pensions industry.
The global human resources services firm said plan design must respond directly to expected changes in demographics, as people work longer and demand greater flexibility around the time of retirement.
Raj Mody (pictured), pensions strategy consultant at Hewitt, said: “We need to get away from the idea that retirement happens over a weekend. Instead, because of changing work and retirement patters, people are more likely to want to phase into retirement, possibly over several years, taking on a different or part-time role as they do it. New pension designs must support, not hinder, that need.”
Hewitt said some hybrid designs, like Career Average Salary plans and Cash Balance plans were a “welcome step towards a better compromise for sharing risk”. But voiced concern that these designs would not go far enough in meeting the likely demands of companies and their employees over the next decade.
“Existing final salary or defined contribution (DC) arrangements are not sustainable for most employers or employees, as one party bears all the financial risk in either scenario,” Mody said.
“Options such as Career Average Salary plans usually still leave most of the risk, including the life expectancy risk, with the sponsoring employer. And simple variations on defined contribution (DC) such as Cash Balance plans still leave most employees with a lumpy one-off annuity conversation at retirement.”
Pension tax changes from April 2006 will enable a much more flexible approach and employers should embrace more inventive designs in the lead up to implementation, Hewitt says.
Kevin Wesbroom, retirement consultant, added: “Some companies are beginning to react to the challenges they will face over the coming years. This is a growing minority, but we still feel there needs to be much greater awareness of these issues.”
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