By Ilonka Oudenampsen
The lack of guarantees and transparency in DC schemes could lead to a problem of trust, according to a new EDHEC-Risk Institute study.
Entitled ‘Shifting Towards Hybrid Pension Systems: A European Perspective’, the study said it is important that some guarantees are offered in DC funds and that their costs are clearly explained in order to avoid creating a biased risk/return illusion.
Primarily in the UK, DC scheme members bear all the financial risks, while no guarantees are offered by the sponsor or by prudential regulation. By offering some guarantees and more transparency, future disappointment amongst employees, who would reduce their participation in such schemes and potentially question their perception of their overall remuneration, would be avoided.
The institute also said that DC funds are currently under-diversified and need to stop solely investing in equities and government bonds. It pointed out that regulators can also contribute to the adoption of professional management practices for pension funds, and that they have understood the dangers associated with transferring uncontrolled risks to members.
Commenting on the study, EDHEC-Risk Institute director Noël Amenc said, “It is clear that complete reliance on sponsor guarantees for traditional DB funds makes little sense in view of the prevailing economic context and demographic trends in Europe With more hybrid pension schemes in Europe, and a shift towards DC funds in the United Kingdom and the United States, there is a requirement for improved governance, investment options and communication to employees.”