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New research into hybrid pension schemes

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31st Aug 2005
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The Department for Work and Pensions (DWP) has published new research into hybrid ' risk sharing ' pension schemes.

With many firms closing their traditional final salary defined benefit (DB) schemes to new entrants and with the low take-up rate on defined contribution (DC) plans, the hybrid schemes are a new development which aim to provide a half-way house.

Hybrid schemes take numerous forms ' a popular form is the 'nursery' scheme, which provides DC benefits until a given age, followed by DB benefits. As a rough guide, the lower the age at which employees make the switch, the higher the risk for the employer.

An alternative would be to cap the salary used for calculating DB payments and then purchase additional DC benefits with any surplus. Under this arrangement all employees have a protected pension with any surpluses going into money purchase schemes, which frees the organisation from the risk of protected payments for higher-paid employees.

With so many variations on the hybrid pension in the marketplace, the research sponsored by the DWP aimed to promote understanding and discussion of pension scheme design.

The three independent research papers are:
* 'Hybrid Pension Plans: UK and International Experience' by Kevin Wesbroom and Tim Reay of Hewitt Bacon & Woodrow. This report assesses the drivers behind hybrid pension growth and the potential for future growth in the UK. It also details key features of various scheme designs.
* 'Comparing Pension Outcomes from Hybrid Schemes' by Dr Deborah Cooper of Mercer Human Resource Consulting. This research explains how various individuals ' such as high earners or people who take career breaks ' would fare under each type of scheme.
* 'The Optimal Allocation of Pension Risks in Employment Contracts' by Dr David McCarthy of Tanaka Business School/Imperial College, London. This piece of research aims to identify an optimal scheme design and looks at the wider context of occupational pension provision.

Key findings from all three papers can be found in a summary document prepared by the DWP, 'Risk Sharing and Hybrid Pension Plans'.

For example, a big barrier to hybrid pension development for small and medium-sized firms is the lack of insurance companies willing to provide them, and different scheme designs benefit different types of worker.

The research papers can be found at: http://www.dwp.gov.uk/asd/asd5/rrs2005.asp

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