The enduring eurozone crisis poses a number of risks to pension schemes which make it imperative for employers and trustees to consider how they can protect their employees retirement savings, Mercer said today.
With no end in sight to the difficulties in the single currency bloc, the consultancy said schemes should undertake a 'thorough analysis' of potential ways in which the crisis could affect their individual circumstances.
In particular, it highlighted the severe impact that continued market volatility could have on schemes with an over-reliance on assets linked to economic growth such as equities. Low yields on government bonds also mean they are no longer seen as the safe haven they once were.
Tony Pugh, European head of defined contribution consulting at Mercer, said: 'Schemes should review their long-term investment strategy on an on-going basis to ensure it is appropriate. Risk mitigating strategies such as increased diversification, for example to non-traditional asset classes, and communicating to members the importance of diversified portfolios, should be considered.'
Low bond yields have also contributed to a steep rise in annuity prices which, in turn, will reduce retirement incomes for members of DC schemes. With significant price differences between annuity providers in many markets, Mercer said scheme sponsors and trustees should look at how to secure members the best possible deal, such as by using an open marker adviser.
The crisis has also increased the risk of inadequate benefits for retirees as a result of sustained low contribution levels combining with poor investment returns, high annuity rates and falling state benefits.
According to Mercer, this could lead to more employees deferring retirement - a situation that could leave employers facing a higher cost of insured benefits, the blocking of promotion opportunities and reputational damage.
Eventually, employees could start placing a higher emphasis on the level of employer contribution to DC plans when choosing which firm to work for, the consultancy said.
Mr Pugh explained: 'Trustees and sponsors should establish defined objectives for their DC plan and analyse what impact having inadequate plans in place might have on their business. To stay competitive it's also important to do some benchmarking against competitor plans.'
'Providing employees with alternative ways of saving might not only better serve employee needs and help with diversification, it could also deliver better value for money.'
Mercer also warned of the potential for DC providers to be put at risk by the impact the eurozone crisis is having on financial institutions. While there are few case studies to demonstrate what would happen in practice should a DC provider collapse, schemes should give consideration to their potential exit plan if their provider is considered at risk, it said.
