Employers in the troubled eurozone need to take preventative action to help protect the investments of their pension plan members, according to a new release from Mercer.
“There has been much analysis of the current problems in the eurozone, and it’s becoming clear that the path to resolution will be bumpy with a series of dangerous episodes,” said Tony Pugh, European head of DC consulting with Mercer. “As the period of the crisis extends without a near-term solution in sight, companies are becoming increasingly interested in the potential risk exposure of DC pension funds and what measures they might be able to take to protect their employees’ retirement savings.”
The firm has highlighted four potential risk areas from the eurozone crisis that could have direct implications on DC plans:
Investment risk: Continued market volatility could severely impact those plans with an overreliance on growth assets such as equities. And after witnessing historically low yields, many government bonds are no longer seen as the safe haven assets they traditionally were. Pugh says plans should consider such risk-mitigating strategies as increased diversification to non-traditional asset classes, and communicating to members the importance of diversified portfolios.
Annuity pricing risk: Low bond yields have contributed to the steep rise in annuity prices, which, in turn, will translate into lower incomes in retirement for DC members. Sponsors and trustees should look at how they can help members secure the best possible annuity pricing, for example, through an open-market advisor.
Risk of inadequate benefits: Sustained low contribution levels—combined with poor investment returns, high annuity rates and falling government-sponsored benefits—mean that many employees will face inadequate retirement benefits. This, is turn, is likely to lead to a higher proportion of employees deferring their retirement, resulting in challenges for employers, including higher cost of insured benefits and blocking of promotion opportunities, as well as internal and external reputation damage. Talented job seekers could place higher emphasis on the level of employer contribution to DC plans when choosing which firm to work for. “Trustees and sponsors should establish defined objectives for their DC plans and analyze what impact having inadequate plans in place might have on their business. To stay competitive, it’s also important to do some benchmarking against competitor plans,” comments Pugh.
Provider risk: As the crisis impacts financial institutions, Pugh says sponsors and trustees should consider whether their DC provider is at risk. Increased focus is needed on this risk, as well as what safeguards and compensation plans are in place if a provider were to become insolvent.