The report highlights that automatic features, default options and simple information and choice should be considered in this context. For example, automatic enrolment and automatic escalation of contributions harness the power of inertia to get people to start saving for retirement and help them achieve appropriate contribution levels. Default options clearly help people who are unable or unwilling to choose a contribution rate, a pension provider, an investment strategy or a post-retirement product (e.g. an annuity).
Finally, simplifying the decision-making process through, for example, clear pension statements and dashboards, can get people to take action to improve their future retirement income prospects.
The report also maintains that a diversified and balanced pension system that incorporates a funded component such as an annuity is important and remains a key policy goal of the OECD.
The report also argues that better disclosure, pricing regulations and structural solutions are required to align charges levied with the cost of managing retirement savings. Making costs and charges more transparent has been a key objective of policy in all OECD jurisdictions, with measures to improve reporting, communication and benchmarking of investment costs and plan charges becoming more prevalent.
Pablo Antolin, Principal Economist and Head of the Private Pension Unit, commented: “People’s trust in pensions systems is undoubtedly low. There remains significant concern about whether institutions managing their retirement savings actually have their best interests at heart and will deliver on their promises once they reach retirement age.
“Policymakers have made headway over recent years to improve the design of funded pensions to address some of the challenges inherent with low levels of financial knowledge and behavioural biases but there is more to do.
“Ultimately, and for fear of stating the obvious, to ensure higher retirement income, people need to increase retirement savings, pension contributions, and/or the length of the contribution period in both pay as you go and funded pension arrangements. This is even more necessary as improvements in mortality and life expectancy lead to ever-longer periods in retirement. As such we should also look at increased flexibility around retirement age for all groups and ensure that lower socioeconomic groups are not penalised in retirement for having shorter life expectancies.
“Essentially, pension reforms need to be better communicated so that the rationale and effects of pension reforms become clearer. People need a better understanding of what they themselves can do to secure their retirement incomes, why contributions to all types of pension arrangements are important, which vehicles are available for retirement saving, and how they are protected. These key steps should help pave the way to restore trust and confidence in pension systems.”
In 2012, the OECD created the Roadmap for the Good Design of DC Pension Plans as guidance, which was approved and endorsed by OECD pension regulators. Previous editions of the OECD Pensions Outlook have addressed a variety of issues which were prevalent at the time. The latest edition continues this sequential approach and suggests ways to improve the design of DC pension plans, as well as possible improvements to pension policies.
Report highlights:
• Combining funded and pay-as-you-go pensions, automatic mechanisms, and a strong safety net for pensioners improves retirement outcomes. Countries should introduce funded arrangements gradually when diversifying pension systems, especially when contributions will partially, or fully, replace an existing pay-as you-go system. Policymakers should carefully assess the transition as it may put an additional, short-term, strain on public finances and increase risks for individuals.
• Aligning charges levied with the cost of managing retirement savings requires better disclosure, pricing regulations and structural solutions. Measures to improve transparency are essential, but are not enough to align costs and charges. They work best when supported by pricing regulations and structural solutions. To maximise net returns, policy makers and regulators can also use measures such as benchmarking and tying investment expenses more closely to portfolio performance.
• Policy makers could improve financial incentives for people to save for retirement by better tailoring them to different people’s likely responses and needs. Low income earners are less sensitive to tax incentives for retirement savings and are more likely to participate in retirement savings plans if given non-tax incentives like matching contributions and fixed nominal subsidies. Tax rules should be straightforward, stable and consistent across all retirement saving plans. Countries with deferred taxation of retirement saving in place should maintain it because they have already incurred with the costs and the rewards are coming.
• The governance and investment approaches of nationally significant investment institutions provide useful guidelines to strengthen regulatory frameworks. These institutions express their performance objectives in terms of their mission and monitor performance against this long-term goal rather than against a market benchmark. Target date and lifecycle funds are the preferred strategy for institutions with individual accounts. Long-term return strategies may offer better returns, but at a higher risk that insufficient funds will be available to members at retirement.
• Survivor pensions still play an important role in smoothing living standards after a partner’s death, but should not redistribute from singles to couples or limit incentives to work.
OECD Pensions Report
OECD Country Note - UK
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