Defined contribution (DC) pension schemes will come out of the economic crisis in a better position than they went in, says Watson Wyatt.

The financial consultant believes that the 'stress-testing' that DC plans have been exposed to will toughen them up for the future, and as the defined benefit (DB) era ends with more closures expected to future accrual, DC quality will be forced to improve as employers realise current arrangements will not suffice.

A paper released by Watson Wyatt, DC - reality bites, also highlights the issues the current crisis has raised for components of DC, such as governance, investment, communications and at-retirement options.

"The current economic crisis has been a wake-up call for most employer-sponsored DC schemes," commented Gary Smith, a senior consultant at Watson Wyatt.

"Members of DC schemes glancing over their annual benefits statements this year will be disheartened by the dramatic falls in their fund values. That will do little for employees' confidence in DC pensions and in pensions generally. But during the coming months, there will be a significant debate around developing stronger and more focused solutions."

Watson Wyatt said the crisis has highlighted the need for DC plans to be brought to the forefront of employers', providers' and policymakers' minds.

"During the coming months, there will be significant debate around developing stronger and more focused investment solutions. Traditional approaches have been tested and, in some cases, found wanting. The market will learn and move forward. The vital need for strong and robust governance of DC plans has been starkly brought into perspective," added Smith.

- Pensions Age February 2009

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