Letter to the Editor

Dear Editor

Rob Paton’s actuarial success story on the conversion of defined benefit funds to defined contributions is fair enough as far as it goes, but doesn’t cover some of the less attractive consequences.

What the conversion facilitated in many cases was a reduction in employer contributions and hence in the overall quantum of benefits provided. Arguably actuaries might have argued harder for the maintenance of employer contributions at or nearer to long term defined benefit cost levels, and hence for some greater measure of protection of aggregate member interests. This issue is separate from the equity arguments involved in the allocation of that total quantum amongst different categories of member; poor vesting for early leavers was a major reason why defined benefit funds were opposed by unions and was a significant factor in their (slow) demise with the introduction of compulsory superannuation. With the substantial reductions in overall employer contributions which were achieved in many cases, the issue of benefit adequacy will be around for a long time to come. Due to union pressure and Paul Keating’s initiatives, we have much more comprehensive coverage, but 9.5% contributions don’t come close to providing an adequate retirement benefit, even after a long career with no breaks.

The other issue is the shifting of risks from employers to members. The defined benefit fund usually left the main risks – investment, inflation and, in the case of pension funds, longevity – with the employer. I agree that with the end of employer paternalism, as well as the move to total remuneration, this needed to change. However going all the way to defined contribution design jumped to the other end of the risk-sharing spectrum, and moved all the risks to the member. Arguably some intermediate position (or at least some risk-sharing mechanisms) might have been a cause actuaries could have taken up, but we generally went along with the simple (and simplisitic) “solution” of accumulation benefits. True, there have been some tentative moves to partially address two of these problems, such as lifecycle investment products and (recently) longevity risk pooling, but these developments were no help to many who retired in the last few decades. It’s been fortunate that the third of these key risks – inflation – hasn’t been a problem in recent decades; I’m old enough to remember the inflation of the 1970s and early 80s which rendered defined contribution funds so ineffective and led to the general shift to defined benefits in the first place.

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