WTW urges employers to move beyond fixing the “broken” defined contribution (DC) pension system and instead proposes four alternative pension designs that could provide better retirement outcomes.
Whole-life collective defined contribution (CDC), defined benefit plans (DB) with variable increments, purchasing CDC retirement incomes using DC pots, and a variable cash balance with CDC are some of the solutions described in WTW’s paper titled ‘Reimagining Pensions’.
According to the paper, the predicted retirement incomes for each option, when combined with annuity purchasing, are 35–55 per cent greater than those of the present DC model.
Additionally, WTW is pushing for reforms to the legislation to make it easier for these solutions to be adopted.
Rash Bhabra, head of WTW’s Retirement practice in Great Britain, 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.”