Pension Adequacy: The Challenge for Defined Contribution Pension Plans

Abstract

With the shift from defined benefit (DB) to defined contribution (DC) pensions gathering momentum in the aftermath of the financial crisis, there is a renewed focus on what kind of pension DC members can expect in retirement. Will current DC pension plans be sufficient to provide an adequate income in retirement and to what extent can members afford to take investment risk with their pension savings? Yet, it is unclear to many members and plan fiduciaries as to what kind of retirement income their pension plan will generate and how this differs across different groups of employees. Indeed, an understanding of the expected retirement outcomes members can expect is arguably critical to a fiduciary in setting a plan’s investment strategy. How else will the fiduciary be able to assess the membership’s ability to take on investment risk? This report addresses these questions and examines the ‘adequacy’ of current DC pension arrangements and which worker groups are most at risk of reaching retirement with insufficient pension incomes. Plan sponsors and fiduciaries can then better understand the outcomes members can expect at retirement and design more appropriate strategies as a result.