For-profit defined contribution (DC) arrangements offer members a “bad deal”, as the provider’s interests do not align with those of beneficiaries, respondents to an IPE survey have argued.
Some 58% of respondents to IPE’s latest Focus Group agreed that those saving into products run for a profit, such as those offered by banks and traditional insurers, were more likely to see sub-optimal outcomes.
Respondents generally highlighted the cost of the products on offer across Europe, suggesting the additional fees did not support higher returns or better products.
One respondent from Norway said the alignment of interest between provider and individual saver was less apparent in third-party solutions.
A second from the UK added: “[They are] product-focused and not outcome-focused – opaque, [with] high charges and poor customer service. What’s to like?”
However, another UK respondent placed the onus for pension provision on employers, rather than employees, noting: “Individuals who don’t take charge of their own affairs tend to get a bad deal.”
The respondent, working for the UK branch of a European multi-national, said he accepted that for-profits in some countries offered a “bad deal” but argued that regulation favoured the banking and insurance industries.
One other respondent from the UK said the question was unfair and pointed to some local providers offering one of the lowest charging structures in the country prior to the introduction of the UK’s 0.75% basis point cap on default fund charges, while still operating on a for-profit basis.
However, a Dutch respondent questioned the level of independence enjoyed by those operating for-profit arrangements.
He said disagreed DC was the future of pension provision – a position that puts him at odds with two-thirds of the Focus Group’s 41 respondents, representing more than €390bn in assets.
“A lot needs to change before the DC [vehicle] is an acceptable solution for the pension needs,” he added.
His view was shared by a second Dutch respondent, who pointed to the use of risk-sharing as a means of mitigating some of the problems associated with DC.
Several other respondents – from Iceland, the UK and the Netherlands – also emphasised the need to reduce investment risk faced by members, either by designing in a strategy that takes account of risks or by sharing the risks associated with longevity and inflation.
One UK respondent pointed to the benefits of scale and suggested sponsors be asked to cover the impact of certain risks.
A second respondent urged his local industry in the UK to embrace recent regulatory changes allowing for pots to be drawn down from 55 and warned the industry to “stop treating members as idiots who need to be protected”.