Which is the more cost effective?
A report from the National Institute on Retirement Security (NIRS) in the US, found that a defined benefit (DB) pension can deliver the same retirement income at 46% lower cost than an individual defined contribution (DC) account. It argues that DB schemes are ageless and therefore can perpetually maintain an optimally balanced investment portfolio rather than the typical individual strategy of down-shifting over time to a lower risk/return asset allocation - resulting in a 5% cost saving. Finally, the report said that DB plans achieve higher investment returns compared to individual investors because of professional asset management and lower fees - resulting in a 26% cost saving.
In the UK similar conditions have been confirmed to apply to the UK by Stephen Nichols, the Chief Executive of the Pensions Trust writing in Professional Pensions, May '11. More recently a study by Con Keating, head of research at Brighton Rock Group, says that "it is a popular delusion that DB schemes are too expensive" (23 Sept. '11) Full report here.
Over recent years the cost for employers of providing a DB pension scheme has risen for many reasons such as the increase in longevity and this has lead to their closure and replacement largely by DC schemes. However the amount of money paid into DC schemes by employers is now much lower than the amount they used to pay into DB schemes so inevitably this will lead to lower quality pensions for employees.
Can DB schemes be made affordable? Is it possible to devise a compromise between DB and DC? The OPA maintains that the answer to both questions is yes. Read on