The UK is making good progress towards developing a sustainable defined contribution pension system but must do more to focus on providing adequate outcomes for savers, the Organisation for Economic Co-operation and Development said yesterday.
DC pension schemes are expected to provide a 'major source' of retirement funds in many of the 34 countries that are members of the OECD, but a number of factors mean these systems might not produce adequate incomes, it explained in a report, DC design and delivery.
These include contributions being too low, levels of public confidence and understanding of DC being too low, individuals being either unable or unwilling to choose the appropriate funds and investment strategies offering little or no protection against market volatility.
Savers can also be affected by funds being too volatile in the phase just before people retire and the options they use to draw on their savings being unclear and, in many cases, not fit for purpose, the OECD noted.
However, the OECD's research has found that, where workers save for 30-40 years, it is possible for DC systems to produce 'attractive' returns within a low volatility environment, in turn delivering adequate retirement incomes.
It detailed 10 optimal design and delivery features for a DC pension system in a Roadmap for the good design of DC pension plans, covering areas such as contribution levels and investment strategies.
Pablo Antolin, principal economist at the OECD's financial affairs division, said: 'The OECD recognises the progress that the UK and many other countries around the world have made to develop frameworks that offer sustainable and meaningful incomes for people in retirement.
Whilst it is good to recognise this progress it is also critical that further efforts are made to improve the design of DC pension plans in line with the OECD roadmap for the good design of DC pension plans.'
Among the areas highlighted by the OECD are the need for high participation rates and adequate contributions over the long term and the promotion of well-designed initiatives to encourage people to save for retirement - especially when joining a scheme is voluntary.
Governments should also ensure the design of pension plans is 'internally coherent' between the saving - or accumulation - stage and the payout phase and also with other aspects of the pension system such as the state pension.
Ideally, they should also promote low cost retirement savings instruments and ensure savers have the choice between a range of funds to invest their savings, including an appropriate default fund. These default options should use life-cycle strategies to protect people nearing retirement from negative outcomes with their savings, the OECD said.
Annuitisation should be encouraged to protect savers against longevity risk, with a focus on competition and adequate supply of annuities in the market. Action to address financial illiteracy was also identified as key by the OECD.
Steve Webb, the UK's pensions minister, added: 'We've made great strides with automatic enrolment, but that's just the start; we must ensure that people can access high-quality schemes that are affordable to employers and attractive to employees.
'Too few people have been saving into pensions and part of this is a lack of trust. We need to restore confidence. By reinvigorating workplace pensions, having new defined ambition pensions and ensuring value-for-money charges, we can get more people to put something by for their old age.'