Groups running defined benefit or defined contribution schemes in the UK are likely to come to very different conclusions after the recent equity market falls.

At first sight, DC pension schemes, where members’ eventual pensions depend partly on the investment performance of their assets, are among the losers of the decline in equities since the credit crunch began.

DB members, on the other hand, have been protected, as the investment risk in DB plans is borne by the employer, not the individual employees.

But beneath this superficial analysis, the recent market falls are likely to trigger the migration of scheme members from DB to DC plans and in turn the evolution of those DC plans.

One key factor is the state of the equity markets at 31st December 2008, when many employers have their financial year end.

If equities have not recovered by then, many DB schemes could be heavily in deficit.

This means that employers may need to find additional funding at a time when the businesses supporting the DB schemes are already heading into recession.

The upshot of this may well be the closure of many private sector DB plans to all future benefit accrual.

An estimated 80% of UK private sector DB schemes are currently shut to new members, so closing those schemes to any further accrual is a natural step for employers seeking to keep the lid on DB costs.

Once this process starts, it could spread through different industry sectors, as employers follow each other putting all staff in DC schemes for future benefit provision.

The impact of widespread DB scheme closures to all future accrual is likely to be profound. DC pensions will become the dominant item at pension trustee meetings and employers are likely to re-evaluate their DC plans.

Importantly, the sudden influx of members, creating much larger DC schemes, will give employers much greater buying power when negotiating, or re-broking, the terms of their DC plans.

Some employers will want cheap and simple DC plans, while others will look for high quality arrangements, with bespoke services and slick administration. DC providers could see a rise in business, but from demanding purchasers.

And investment, following equity market woes, is likely to be a critical issue for DC scheme design.

One DC provider recently its research found that many employees draw a distinction between saving and investing, with pensions being seen as a way of saving for retirement.

For saving, any loss of assets, over any time-frame, is unacceptable, whereas investing is seen as a risky activity.

This means that DC members hate losing funds in falling markets and investment options need to be revised to reflect this, if DC plans are to retain member support.

For example, target rate funds, which aim to pay out a return above inflation, are one option for avoiding market volatility.

On the other hand, those members that see pensions as investment vehicles are more likely to tolerate periods of underperformance and may want wider investment options.

UK pension provision has been split between DB and DC for 10 to 15 years now.

Recent market turmoil could be the final straw for many employers and could lead to a significant step away from DB plans which have served members extremely well. Unfortunately, many employers can no longer afford generous DB plans. If fund values stay low at the next valuation date, the future challenge for employers and pension providers could be to make DC pensions as attractive as possible for large numbers of incoming members. The key difference between DB and DC plans is who bears the investment risk. At present, individual members have been exposed in DC plans, while their employers will feel the pain in DB plans. But ultimately, both DB and DC plans will need better investment returns if they are to provide decent pensions. The harsh truth for the pensions industry is that without good investment performance, it will be not help individuals retire in comfort.