Flexibility: Cater to personal circumstances (both the benefit type and the contribution level) + risk appetite
Transparency: turnover
- The greater flexibility on retirement will allow the member to purchase an annuity that best reflects their individual circumstances (e.g. with regard to spouse’s pension, increases to pensions in payment, guarantee periods). Also, for individuals in poor health on retirement, it may be possible to purchase an impaired life annuity (or use the income drawdown approach), thereby receiving a higher level of pension income than would likely have been provided through the DB pension scheme.
- In addition, the DC pension scheme is likely to offer a range of investment opportunities prior to Retirement, so that the individual member can invest his/her own fund in a way that reflects their own risk appetite. And, the opportunity to purchase a with‐profit or unit‐linked annuity and/or an income drawdown product on retirement, allows the member to continue to share in investment performance after retirement too.
- Also, in most DC pension schemes, it will be possible for the member to vary the level of contribution payable in any given year to reflect current circumstances (e.g. if the member is recently married or has a young family, contributions can be temporarily reduced, and if the member has more disposable income or receives a one‐off bonus payment, a higher contribution can be made to the fund).
- Finally, DC pension plans are more portable and transparent when a member moves from one job to another. In a defined‐benefit pension scheme, the link between current salary and accrued pension is broken when the member leaves the company (and, as a result, the value of the accrued pension is usually much lower than if the member had remained in service). However, this is not the case in a DC pension scheme, as the accrued pension pot is (largely) unaffected by moving from one employer to another. Given that employment is much more transient nowadays, this greater flexibility and transparency may be welcomed by employees.