Some experts maintain that defined benefit (DB) plans could provide similar income streams at the same or even less cost than a defined contribution (DC) plan. So why is the shift to DC plans increasing?
That’s because in a DB scheme, the company would have to shoulder most of the risk – and they don’t see the benefits in that.
What will be your greatest concern, if the shift from DB to DC pension plans continues?
My greatest concern is that, in opting for a DC plan, the risk is going to be carried by someone who is ill prepared to deal with the decision-making and the risks involved.
If it isn’t possible to fulfil guarantees under the current low-interest-rate environment, what would you expect to happen?
More political pressure will then be put on policymakers to keep guarantees in place. Even if they aren’t functioning well, the same political pressure that called those guarantees into being will also cry out to have them saved.
What’s the alternative if neither individuals nor companies are prepared to shoulder inflation, investment and longevity risk?
In that case, the bonus should be shared by both parties. By requiring companies to institute auto-enrollment, they aren’t put at a competitive disadvantage to a company that doesn’t offer auto-enrollment. Auto-enrollment also puts an onus on the individual, who is now signed up and committed to the fund.
If we were offered the chance to design a new pension framework from scratch, do you think we would get rid of pension protection funds altogether?
I think that the people who created them would either continue to keep them in place or put themselves at political risk. However, I think it unlikely that these schemes will be eliminated altogether.
Do you expect a pension protection fund to be bailed out, if it runs into trouble?
Assuming there is a state to bail them out at all, then yes, I believe there will be enough political pressure to rescue it.