Helped by market gains and rising long bond yields, defined benefit (DB) pensions are showing improved solvency following several years of higher deficits. But the news may not be as good for defined contribution (DC) plans.
The latest DC retirement index from Towers Watson shows a slight increase in monthly pension, from a low of 13.4% of monthly wages in November 2012 to just 15.2% as of September 1, 2013.
When compared to the high of 22.3% in December 2007, it’s clear that defined contribution plans continue to struggle, states Towers Watson.
“While both DB and DC plans have benefited from improved market gains, differences in funding design have contributed to the difference in relative performance,” says Ian Markham, Canadian retirement innovation leader at Towers Watson.
“One important distinction is the opportunity for de-risking. DB plan sponsors have been able to use improving financials to consider de-risking strategies to lock in a portion of the recent market gains. However, DC plans do not have access to the same opportunities and will not benefit as readily from the same market gains.”
Another factor is workers with defined contribution plans don’t make extra payments to make up for bad investment years, while defined benefit contributors do.
The Towers Watson 2013 Pension Risk Survey found 78% of employers who sponsor a DC plan say retirement security has become a more important issue for mid-career employees over the last three years.
But only 23% of the participating DC plan sponsors expect their plans to play a bigger role in their organizations’ total compensation strategy over the next five years—and 18% expect retirement plans to play a lesser role.
Over the past five years there has been very little change in maximum employer and employee contribution levels to DC plans. Employer contribution rates for close to 75% of the plans Towers Watson tracks haven’t changed. But 17% of plan sponsors have increased their maximum employer contributions, from an average of 5.1% to 7.3% of pay.