Occupational pension funds have existed in many countries for more than 100 years but there are now new challenges as pension systems around the world continue to evolve. One of the most fundamental changes has been the ongoing shift from employer sponsored defined benefit (DB) schemes to defined contribution (DC) arrangements. The reasons for this global trend are many, including the desire by employers to reduce their risks, changing workforce patterns, the impact of accounting standards and increasing regulation. Whatever the actual reasons in each country, the outcome is the same. That is, the risks associated with the provision of pensions have been passed from the sponsoring employer to the individual member.
The traditional defined benefit pension scheme promised the employee a retirement pension (usually linked to their salary and length of service), sometimes indexed to maintain its real value or purchasing power. If an individual had worked for the same employer for three or four decades, it was likely that the pension would not only be adequate to maintain their pre-retirement living standard but that it would also be secure, assuming the ongoing financial support of the employer. However, with increasing life expectancies, tightening accounting standards, volatile investment markets and ongoing economic uncertainty, it is understandable that many employers are no longer willing or able to make such long-term promises.
The defined contribution world has already become well established in many countries and other countries are clearly heading in this direction too. It represents a significant paradigm shift in the design, development and operation of pension systems. This fundamental change has several consequences.
To understand these consequences and the risks faced by retirees, and consider the best approaches to convert a capital sum from a DC plan into an income stream, please refer to Chapter 4 of the 2013 Melbourne Mercer Global Pension Index Report.