The OECD, a Paris-based group of mostly wealthy nations, has stressed the need to strengthen defined contribution pension design, as well as the education and advice offered to members.
Speaking at an event to launch its 'Pensions Outlook 2016' report, the OECD highlighted the need to improve DC design across the countries it covers.
They put more of the risk of saving for retirement in the hands of individuals. We need to improve the design of DC pension plans
Pablo Antolin, OECD
To help with this, it has created the 'OECD Roadmap for the Good Design of DC Pension Plans', which highlights 10 guidelines to improve DC, including encouraging enrolment and contribution, promoting low cost savings instruments and establishing appropriate default investment strategies.
Pablo Antolin, principal economist for the OECD’s private pension unit, said: “One of the advantages [of DC] is this direct and straight link between contributions, assets accumulated and pensions, but it also has disadvantages."
The main disadvantage is that the individual members carry a great deal of risk, he said: "They put more of the risk of saving for retirement, in particular investment and longevity risk, and also the whole issue of the decision-making in the hands of individuals... We need to improve the design of DC pension plans.”
DC has created a need for education and advice
Putting the decision-making process into the hands of individuals increases the need for them to be well informed, and for accessible and high-quality financial advice.
The Pensions Outlook report states: “Much evidence shows that individuals are ill-equipped to make such complex decisions on their own. Savings gaps are persistent, levels of financial literacy are low, and retirement planning in particular includes numerous variables that are uncertain, including future inflation, returns and longevity, which most individuals simply do not have the knowledge to assess. Furthermore, retirement products can be particularly complex and present features which may be difficult for the average consumer to easily understand.”
Jessica Mosher, private pension analyst for the OECD, said the creation of viable robo-advice providers could be a solution to the challenge of advice.
“Ultimately it’s likely that a lower cost solution will need to be found to serve, in particular, low to mid-wealth clients,” she said.
Education and advice needed for future of saving
Closing the advice gap is crucial to preventing poor outcomes, as the need for savers to be educated about what will be necessary for retirement and the risks they face has increased.
“Technology-based advice has the potential to do [this], it can offer a type of advice at significantly lower cost than traditional channels and can also potentially offer - as it’s based on algorithms - greater consistency in terms of recommendations.”
Alongside advice, the report said, individuals must receive education to ensure they have the tools to understand the information they are receiving and put it to use.
Chiara Monticone, policy analyst at the OECD, stressed the need to ensure people know how to apply information.
“Financial education can be an important tool to support individuals in their decision-making for retirement,” she said. “Of course, it is not a silver bullet, it has its limitations. It’s unlikely to be able to solve all the behavioural biases that people have. It’s certainly not the only tool in the hand of policymakers.”
