Design of private funded pensions must be improved, says OECD

The OECD's 2016 Pensions Outlook looks at how pensions are faring when faced with ageing populations, the fallout from the financial and economic crisis, and the current environment of low economic growth and low returns.

The increase in funded pension arrangements mostly comes from defined contributions (DC) pensions where there is a direct link between contributions, assets accumulated and pension benefits. Although these arrangements have advantages, the OECD said, they put more of the risks of saving for retirement and decision making in the hands of the end customer.

In most OECD countries, the tax treatment of retirement savings provides an overall tax advantage for individuals over their life cycle, but the size of the advantage varies, the OECD said. In at least 20 OECD countries, tax benefits for retirement savings increase in relative terms with income. Introducing flat-rate subsidies and matching contributions could help to target assistance towards lower-income individuals and prevent a further widening of inequalities upon retirement, it said.

Pensions expert Alastair Meeks of Pinsent Masons, the law firm behind Out-Law.com said:

"The OECD nails its colours to the mast of flat rate tax relief. The British government has flirted with this at times in the past but has so far apparently decided that wrestling with the implications of that for defined benefit arrangements is just too complicated to countenance."

A coherent framework is needed to encourage the use of annuity products, as these can play an important role in helping individuals mitigate their investment and longevity risks, the OECD said.

"However, increased product complexity heightens the need for appropriate financial advice and comprehensible product disclosures to ensure that consumers purchase products suitable for their needs. It also underlines the need for the regulatory framework to adapt to innovations in product design and encourage appropriate risk management for annuity products," it said.

Policy makers need make sure that consumers receive appropriate financial advice, that the conflicts of interest that advisors face are mitigated and that advisors are adequately qualified. Advice must also remain accessible and affordable, and the OECD suggested that technology-based advice could play a role in this.

Low financial literacy must be tackled, as individuals are increasingly responsible for managing their own wealth the OECD said.

"Financial education for retirement planning should be implemented, whilst information about pensions should be available, clear and not overwhelming for individuals," it said.

Advice should be standardised where possible, and all information for individuals’ pension plans should be combined and available to use with calculators/simulators in order to provide greater insight, the OECD said.

Meeks said: "The OECD champions financial education for retirement planning and information about pensions that is available, clear and not overwhelming for individuals. That begs the question of how that is to be achieved. Governments are keenly aware of the need for all of this, but it is a lot easier said than done.  Life is complicated: it’s not surprising that deciding how and what to save is complicated too."

Four OECD countries have separate civil service pension schemes, and the pension promises for these schemes are 20% higher for a full career than in private sector schemes. The OECD recommends that a pension framework should apply the same rules to both, to "facilitate labour mobility and increase efficiency", it said.