Defined contribution plans accounted for half of all employer-sponsored retirement arrangements in 14 countries last year, a new survey by William M. Mercer Cos. Inc., New York, shows.
In the United States, 60% of all employer-sponsored retirement arrangements in 1998 were defined contribution plans, the survey noted. Mercer predicts that will grow to 70% by 2003.
Although each country's reasons varied, the report on 38 countries showed these general forces driving the adoption of defined contribution programs:
* Flexible employment arrangements are overtaking the traditional long-term, permanent employer-employee relationship.
* Employees want lower employer pension costs and a say-so over their retirement investments.
* The risk of an eventual retirement benefits shortfall shifts from employer to employee.
* Defined contribution plans require less complex regulatory frameworks than defined benefit plans.
"Defined benefit pension plans -- unless corporations do a really good job of communicating them -- have little value to an employee until he reaches retirement age," explained Kathleen Lamb, a Mercer consultant.
Because defined contribution participants receive frequent account updates, "employees can get their arms around it," she said.
Employers like defined contribution plans because they allow them to share the risk, she said. And, multinational corporations are bringing their pension programs with them as they expand into new parts of the world, Ms. Lamb said.
Resistance in Japan
But there's resistance in Japan.
The survey ranks the ease with which defined contribution plans can be established in Japan as "difficult or impossible," a ranking given to only seven of the countries studied. The others are Finland, Norway, Turkey, China, South Korea, France and Germany.
"In some countries the tax and regulatory environment is very unfriendly," Ms. Lamb said. "In Japan it (changing the environment) is being talked about, but whether it will come to fruition is another matter."
In Argentina, the government in 1994 replaced its defined benefit system with an integrated private defined contribution system covering retirement, death and disability benefits.
Under the private system, employee contributions are directed to an individual capitalization account with an authorized pension fund administrator, the report said.
In 1998, 68% of the corporate pension plans in Argentina were defined contribution plans, and Mercer expects this percentage to rocket to 95% in 2003.
All new employees are required to join the private system, Ms. Lamb said. Under the new system, contributions are made up to an earnings ceiling currently at $4,800 a month, the survey reveals. Employees contribute 11% of pensionable earnings to the retirement account, plus 6% for various social benefits, it states.
Employer contributions vary from province to province. So, for example, in Buenos Aires, employers contribute roughly 11% for retirement benefits and 11% for other benefits.
Growth south of border
The Mercer study predicts defined contribution plans will continue to grow significantly worldwide, but especially in South America, Ms. Lamb said.
Most of the South American countries surveyed by Mercer already have some corporate defined contribution plans. For instance, Chile's social security system was converted to a mandatory defined contribution system in 1981.
In 1998, 30% of corporate plans in Chile were defined contribution plans, Mercer said. This percentage is expected to rise to 45% by 2003.
Under the Chilean system, each employee has an individual account with a pension fund administration company. About 10% of pay is contributed to this account each month, plus another 3% for administrative costs, disability and death insurance. Both employers and employees can make additional, tax-advantaged contributions.
In Europe, Ms. Lamb said, "I don't think growth will be nearly as substantial."
That is, with the exception of Spain, Sweden, Belgium and Austria, which have the highest growth of defined contribution plans in Europe, she said.
Half of Sweden's corporate retirement plans were defined contribution last year, the survey noted. That number is expected to grow to 75% in 2003. Fueling this growth was a 1998 law allowing more tax-favored defined contribution arrangements in Sweden, Ms. Lamb said.
In addition, all of the employer pension plans in Hungary and the Czech Republic are defined contribution. In Denmark, close to 90% of all plans in 1998 were defined contribution plans, with that percentage expected to rise to 95% in five years.
U.K. situation
Defined benefit plans continue to dominate in the United Kingdom, but interest in defined contribution plans is high among subsidiaries of multinational corporations, smaller companies and certain industries such as banking and pharmaceuticals, the survey indicates.
In 1998, 25% of U.K. corporate plans were defined contribution; that's expected to hit 35% in 2003, Mercer predicts.
The movement toward defined contribution plans in the United Kingdom was accelerated by a 1995 law establishing new minimum funding requirements for defined benefit plans, requiring some employers to make larger contributions in the short term, the report said. In 1997, the government withdrew a tax credit on dividend income from United Kingdom equity investments, and that change may encourage some companies to switch to a defined contribution system.
In the future, money managers worldwide will be asked to expand their investment education to the point where they will be offering investment advice, Ms. Lamb said.
She noted while Australia lags the United States in the maturity of its defined contribution marketplace, investment advice already is becoming a "hot topic" there.
Moreover, as employees become more knowledgeable about investing, they might want a wider range of choices, and mutual fund windows might become more common, she said.
"What this says is, regardless if you're in the United States, Australia or the United Kingdom, the same forces are really driving the move toward defined contribution plans . . .," Ms. Lamb said.
