Zarah ChoudharyWillis Towers Watson (WTW) has called on employers to look beyond just repairing ‘broken’ defined contribution (DC) pension provision.
The firm proposed four ways of replacing DC pensions with designs that could help employees achieve better outcomes without employers having to shoulder the risks associated with traditional defined benefit plans.
WTW’s white-paper, ‘Reimagining pensions’, suggested alternative models which could deliver higher retirement incomes than saving in a DC pension and buying an annuity at retirement.
For example, collective defined contribution (CDC ) pensions could share risks between members and provide pension income rather than pots at retirement, at a fixed cost to the employer.
Pension levels will depend on fund performance, but WTW’s central projection was that, for the same contribution cost, a whole-of-life CDC pension should be around 55% higher than annuitised DC savings.
WTW said more employers would consider this when regulations allow them to outsource CDC provision to a multi-employer arrangement or master trust.
Royal Mail’s scheme provides a blueprint for those that might wish to follow suit.
As legislation allows CDC pensions to be reduced in adverse scenarios, WTW argued that there is no reason in principle to prohibit employers from offering new variable pensions which are Defined Benefit (DB) only to the extent they are guaranteed not to fall.
The least disruptive approach for employers with existing DC plans would be for their schemes to provide a CDC retirement income option.
WTW called for the legislative consultation on this to begin as soon as possible.
The firm’s modelling gives median retirement outcomes of around 40% higher than under DC with annuity purchase.
WTW called on the Government to introduce changes to legislation that allow for innovation in pension scheme designs for the benefit of UK workers, and for the pensions industry to engage fully on bringing about change.
Rash Bhabra, head of WTW’s retirement practice, said: “With every year that passes, employees in most of the private sector are becoming more reliant on DC pensions to satisfy their income needs in retirement.
“DC can be made better, and there is rightly a lot of attention on this, beyond just increasing contributions: schemes can be bigger and more efficient; they can invest more widely and hold growth assets for longer; and they can give employees much more support at retirement. We welcome the sense of urgency on this.
“But we should also ask whether we can do better than DC: in its current form, DC is broken, and we should consider whether it is better to replace it rather than repair it.
“What individuals really need is retirement income.
“Few employers want to go back to anything like a traditional final salary scheme.
“And so we are proposing other ways of providing higher retirement incomes and which avoid leaving employees with decisions that most are ill-equipped to make, such as figuring out for themselves how to stretch out their pension savings throughout their retirement.”
