Expert responses

The survey, conducted last month, drew responses from 1,605 pension experts in the United States, Canada, Australia, United Kingdom and Europe. (Messrs. Clark and Monk also are working on a Japanese version of the survey to extend the survey's findings in Asia. No further details were available.)

Respondents to the P&I/Oxford survey were a cross-section of corporate and public pension executives; money managers; trustees of corporate, public and union pension funds; and governmental regulators.

Most participants--1,058--had more than 10 years' experience each in the pension industry, giving Mr. Clark confidence that the findings reflect expert opinion from decision-makers.

"We are dealing with people paid to have opinions on these issues. There is nothing off the cuff or superficial in their responses," he said. The findings should help encourage a more flexible understanding of how to secure the future of defined benefit plans, he added.

Mr. Monk said he was surprised by the degree of agreement (nearly three-quarters of respondents) that defined benefit plans are a drag on corporate competitiveness. Previous research among a smaller group of pension experts showed no agreement, he said.

Nearly half of the respondents said pension plans are being closed to new members or frozen because of competitive pressure. This raises the question of whether modern companies are the most effective sponsor of long-term liabilities, Mr. Monk said.

And, 65% predicted corporate pension plans will play a less significant role in retirement provision in 20 years than they do now.

That's because in the modern global economy, older industrial corporations are now struggling to meet long-term pension liabilities that had seemed affordable under very different economic conditions in the 1950s and '60s, said Mr. Monk.

But, Messrs. Clark and Monk say it's not clear that today's corporations have a life cycle long enough to match the lengthy liabilities the pension promise creates.

Company executives will have to reconsider plan design to ensure the competitiveness of the plan sponsor and the long-term health of the pension plan, Mr. Clark said.

That more than half of the respondents expect defined benefit plans to still be open to new members in 20 years is a "bold prediction," Mr. Clark said. He noted experts in Canada, continental Europe and the United States were the strongest proponents of that view, while the majority of experts in the United Kingdom and Australia disagreed.

This geographic bias reflected the extent to which experts in Australia and, to some degree, the United Kingdom have debated the future of defined benefit plans and were "actively planning for a post-DB world," said Mr. Clark.

When told about the survey results, Gerry Degaute, chief executive of Royal Mail Pension Trustees Ltd. in London, said he was surprised how many respondents expect DB plans to remain open in 20 years. He said for this to happen, benefits will have to be capped and contributions shared.

Older, younger needs

Another notable survey finding, Mr. Clark said, was the distinction many experts drew between the needs of older and younger workers: Most recognized that defined benefit plans don't meet the needs of younger workers.

And just over half said the model of intergenerational funding--where younger workers pay for the benefits of older workers in the belief that they will be supported by following generations--has negative effects for those expected to bear this legacy cost. This opinion was strongest among experts based in Australia, the United Kingdom and the United States.

While most respondents accept the theory of intergenerational funding, only a minority believes it works in practice, Mr. Clark said. Intergenerational funding, he noted, is at the heart of the defined benefit model.

"Hard questions have to be asked about the level of contributions: Who is making those contributions, what level of risk immunization is offered, and how to balance the interests of the older and younger workers," the Oxford professor said.

Another significant finding: Most experts still believe in the equity risk premium and are unwilling to allow a mature pension plan to invest mainly in bonds. "There is a lot of discussion in the (money management) industry of the perceived need to immunize, but we find people in the industry say, 'Let's stick with equities and risk-based strategies,"' Mr. Clark said.

"I don't think the appetite for immunization is what people might have thought."

Experts with more than 10 years in the pension industry were most strongly opposed to a strategy of mainly bonds. Those veterans "have ridden the tiger from boom to bust and back again. That's a salutary lesson against short-term-ism," Mr. Clark added.

The issue of who should be responsible for financing the unexpected risks of defined benefit plans proved highly contentious.

While most respondents agreed that plan sponsors could not "take into consideration" all unforeseen risks stemming from defined benefit plans, there was strong disagreement over whether plan sponsors should foot the bill for these unforeseen costs.

More than half of European experts said plan sponsors could not be responsible. But that's where any consensus ended. There was considerable disagreement among experts in the same sector, particularly among regulators and consultants.

"I don't think the model of holding the plan sponsor accountable for unlimited liabilities is viable for the future. The cost of that may be to destroy DB for younger workers," said Mr. Clark.

"If DB is to survive, it has to be redesigned to be more flexible to reflect unforeseen liabilities and different ways to adjust to those," he said.