Cover:DB v DC

Illustration by Chris Buzelli

Defined benefit (DB) schemes in Europe are on the wane, with the few remaining private schemes still open to new members closing one by one. Even pension providers and consultants are closing schemes; for example, Aviva, which shut its UK final salary pension scheme in November.

However, when thinking about closing these plans, sponsors need to consider their options carefully.  “Sponsors risk throwing the baby out with the bathwater and losing some of the good features of their existing DB scheme such as good trustee government structure, the flexibility to make changes without having to interact with members, and far cheaper investment choices when compared to retail markets”, says David Hutchins, UK Head of Research and Investment Design at AllianceBernstein, who believes that many current DC schemes risk falling into the trap of paying near-retail price for their investments.

In many Western European countries, there is also a general sense of entitlement to DB schemes amongst the population, especially for government workers, that can need to be treaded around carefully. “DB scheme entitlement is almost a political issue. People clearly think they are entitled to them, with the French experience being an example”, says Peter Robertson, Head of Retail Investment at Vanguard, referring to recent strikes and protests against a change to the age at which workers can draw their state DB pension.  The change was pushed through by French President Sarkozy in an effort to generate cost savings.  “Europe-wide there are strong state DB schemes, and in many cases the ability to pay has become an issue for the state; however, that does mean that the scheme is only as strong as the state which sponsors it. For employer-sponsored schemes, there are less than a handful of very large open DB schemes as structural deficits have to be addressed.”

John Stannard, Co-Chair of Global Consulting and Advisory Services at Russell Investments, agrees: “DB schemes are often seen as a gold-plated pensions. They are very generous to the pensioner with all the risk taken by the employer. They are very popular as a result. However, the regulatory and financial world has changed, making DB schemes unsustainable, with employers looking to move the investment risk to the employee in the manner of a DC scheme.”

However, Stannard does not believe that the sense of entitlement to DB schemes is strong enough to prevent a move towards DC within the private sector. He says: “If individuals felt very strongly about DB versus DC, we would see more people changing jobs as a result of scheme closures. There doesn’t seem to be any kind of strong uprising against moving to DC.”

There are many reasons behind this complacency, which may depend, at least in part, on where the scheme is based. In some territories, such as in the UK and Germany, there is a degree of resistance amongst employees to change, but when combined with a sense of inevitability, many think there is no point in resisting, though there are some notable exceptions to this rule, including current strikes by BBC workers in the UK following the announcement of the closure of their DB scheme.