Private pensions and the financial crisis: How to ensure adequate retirement income from DC pension plans

Abstract

The current economic and financial crisis has shaken confidence in funded pension systems in general and in defined contribution (DC) pension plans in particular. The crisis has highlighted the impact of market conditions on retirement savings accumulated in DC pension plans and the uncertainty as to whether those retirement savings may prove adequate to finance retirement – particularly for those close to retirement. The purpose of this paper is to provide recommendations on how to ensure adequate retirement income from DC pension plans. In this context, this paper addresses three main questions: 1) How much do people need to save? 2) How can the effects of market risk on DC pension plans be alleviated? 3) How can retirement income be protected during the payout phase? The analysis concludes that in order to deliver adequate retirement income from DC pension plans with a certain degree of certainty, there is a need for comprehensive measures which include: higher contributions; increasing the contribution period by postponing retirement; setting as default options relatively conservative investment policies including life-cycle strategies; and managing risk in the payout phase with inflationindexed life annuities.