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Making decisions

What are the challenges when comparing DB and DC?

The importance of planning your DC risks

Sacha van Hoogdalem discusses the complexities associated with considering DC offerings as an alternative

In the current economic environment managing a pension fund has proven to be challenging. Many pension funds have seen the value of their defined benefit (DB) pension promises balloon due to historically low yields. In addition, the size of these liabilities increases over time, as the fund accrues new benefits. These effects, combined with uncertain market conditions, leads to ever increasing variability of the absolute funding gap; assets minus liabilities.

As the sponsor’s ability to bare these risks remains relatively stable, more and more DB funds are starting to question the long-term viability of this benefit structure. The covenant simply cannot absorb this much risk, without serious implications for its own solvency or adversely affecting the tax payer. These covenant risks very often drive sponsoring employers to close DB pension funds to new entrants and to consider offering defined contribution (DC) benefits.

In this article I aim to highlight the complexities associated with considering DC offerings as an alternative and emphasise the importance of accurate, useful information to support decision making with an unbiased assessment of the interests of each stakeholder.

Read the full article here.