OECD publishes report on DC pensions

The Organisation for Economic Co-operation and Development (OECD) has published a report summarising the challenges that policymakers face around defined contribution (DC) pension schemes.

The OECD Roadmap for the good design of DC pension plans, recommends key improvements that can help ensure DC pensions deliver the incomes that individuals need to retire.

The report’s key messages for DC development include:

  • Ensuring greater coherence between the accumulation and decumulation phases, and with the overall pension system, including a better focus on the target retirement income, for which all risks affecting saving for retirement (for example, labour, financial and demographic risks) should be monitored.
  • Increasing contributions, either mandated or through ‘nudge’ techniques, such as automatic annual increments.
  • Encouraging people to contribute for longer and, for those who are able to do so, to work longer.
  • Replacing or complementing current tax incentives that favour higher earners with matching contributions to make sure that incentives favour lower and median earners as much.  
  • Complementing disclosure-based initiatives to ensure low charges with more effective solutions, such as appropriate tender mechanisms or default allocations to low-cost providers.
  • Establishing default investment strategies, such as lifecycling, that mitigate volatility and the risk of a sudden market shock, such as the 2008 financial crisis, for people close to retirement.
  • Encouraging annuitisation as a protection against longevity risk. Combining programmed withdrawals and deferred life annuities could be an appropriate default for the payout phase.
  • Promoting the supply of annuities, innovation and cost-efficient competition in the annuity market.
  • Developing risk-hedging instruments to facilitate dealing with longevity risk.
  • Ensuring effective member communication and addressing financial illiteracy.  

Steve Webb, pensions minister, said: “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.”

Pablo Antolin, principal economist in the OECD’s financial affair division (pictured), added: “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.”