Over the past five years employers have changed their attitude to defined contribution retirement funds.
Initially they resisted moves from unions to set up defined contribution funds for two main reasons - one was they would have to give retirement fund benefits to people who had previously been excluded, particularly semi-skilled and unskilled workers and secondly they would lose control of the assets of their fund.
Their attitude has changed. There is now an almost ungainly gallop by many employers to encourage employees to change from defined benefit to defined contribution schemes.
Again there are two main reasons.
The first is that employers transfer the risk of having to meet the obligations of paying a pre-determined pension from themselves to you. In other words, if the value of the assets in the retirement fund drops as a result of a stock market crash it becomes your problem. The flip side is that if there are major stock market gains, you become the winner by transferring to a defined contribution fund.
The second reason is AIDS. This disease is hurtling like a cruise missile to the very heart of the retirement industry, particularly group life disability and death schemes.
Over the past few weeks I have had a number of people approach me about the issue asking for advice on what choice they should make.
The most important piece of advice is to realise that this is not a "same size fits all" decision. Everyone's circumstances are different. Some people have dependants, others do not; some have a solid savings base, others are virtually bankrupt; some are old and some are young; some will be affected by tax and others will not. These are all factors that must be taken into account when making the decision.
The worst thing you can do is take the opinion of the person in the office next to you or from your friend who lives next door.
You need to ask about all the details and make sure you get these details from your fund and employer. Ask the opinion of advisers. Make sure you understand all the concepts and most important of all make sure you understand the risk.
At the moment there are many people boasting about the enormous growth in their retirement fund and how they made the right decision by swapping from a defined benefit to a defined contribution fund.
I quoted Allan Gray above to highlight the concern that the bull market may not continue forever. In fact, over the past 12 months returns on the stock market have not been that great.
There is another simple wisdom that is often forgotten: "Every bull market is followed by a bear market. It is just a question of when."
None of us know.
By moving from a defined benefit scheme to a defined contribution scheme you take over the investment risk. If the market collapses so do your assets under a defined contribution scheme. Stick with the defined benefit scheme and it is essentially your employer's problem.
Of course if markets go the other way you could score big.
The main issues you must consider are:
* Your ability to take the risk of the market;
* Your ability to meet the needs of your dependants;
* The tax consequences, if any, of your decision;
* The position of the fund surplus, if any, and how it could impact on your benefits;
* Whether you intend staying in the same job and what you take with you if you resign;
* The group life and disability benefits your dependants will receive if you die.
* Whether you want your capital when you die.
Over the next few weeks I will be dealing with these issues so that you have a better idea of what you need to know.
