The Report ”Road to DC: Understanding the Shift” provides an exhaustive analysis of the ongoing transformation from Defined Benefit (DB) to Defined Contribution (DC) pension schemes across European Member States.
The objective of this paper is to explore the shift from DB to DC schemes taking place in many European countries and to provide some general solutions for building resilient and adequate retirement provisions in a more DC-oriented world.
The precise nature of DB and DC often differs across Member States, and there is no single approach to pensions. This paper uses the OECD taxonomy of DB and DC schemes to streamline the discussion.
While the shift has been in place for many years in some European countries and remains steady, the paper indicates that some historically DB/hybrid-dominated countries have been experiencing a more recent transition towards DC schemes with different magnitude levels. Despite the growing importance of DC schemes, it outlines that DB provisions persist in Europe, with the majority of members still enrolled in those schemes at the moment.
Various general factors, including demographic shifts and accounting standards changes, have caused this shift. Different trajectories are taken by countries. Country-specific reforms are important drivers as illustrated by the Dutch transition from DB to DC and the adoption of auto-enrolment in the UK and Ireland.
The transition to DC schemes shifts a greater burden of risk onto employees, potentially jeopardising pension adequacy. Factors, such as inadequate contribution levels or suboptimal decision-making by participants can exacerbate these risks. However, the degree of risk exposure varies based on the scheme model. Collective Defined Contribution (CDC) schemes and hybrid models, for example, provide greater risk-sharing among participants compared to individual DC schemes. In addition, it is essential not to overlook the advantages of DC schemes, particularly for employers seeking cost predictability.
While DC frameworks are different among Member States, several common themes are emerging. The paper advocates for key principles spanning from robust scheme design to comprehensive decumulation options, and tailored legislation to national contexts. Striking a balance between regulation and operational efficiency is essential to safeguard members’ interests and minimise administrative burdens.
Ultimately, the paper stresses the importance of ensuring savers achieve secure retirement outcomes, receive adequate support and guidance throughout their pension journey, while also optimising value for money and participation costs.
