This paper examines recent developments and the major risks of retirement systems, from both the sponsor and pension risk perspective, while focusing on European pension schemes. The study looks at plan design and governance, with the aim of moving towards an ideal retirement plan, and analyses the challenges for the financial management of hybrid pension plans.
It is clear that complete reliance on sponsor guarantees makes little sense in view of the prevailing economic context and demographic trends in Europe. With more hybrid pension schemes in Europe, and a shift towards Defined-Contribution (DC) funds in the United Kingdom and the United States, there is a requirement for improved governance, investment options and communication to employees.
As this study indicates, a degree of regulatory convergence is desirable, with DC funds having more guarantees and, at the same time, more flexibility to diversify risk and adopt professional risk management practices. Defined-Benefit (DB) and hybrid funds need more flexible guarantees. However, while regulators must try to design an adequate framework and give adequate incentives, it is the responsibility of the industry, whatever the category of fund, to make the considerable improvements in investment and risk management practices that are now needed.