The OECD has published a 10-point plan for the good design of defined contribution (DC) pension plans, elevating the updated “roadmap” to the status of an OECD Council recommendation.

The initial guidelines were published in 2012, with the OECD’s working party on private pensions (WPPP) deciding to revise the report to incorporate all the work conducted over the years since and “to maintain its relevance given current contextual realities and the cumulated experience observed in OECD jurisdictions”.

“It’s a comprehensive update with comprehensive recommendations spanning accumulation and the pay-out phase,” Pablo Antolin, principal economist in the private pension unit at the OECD, told IPE. 

He also said the guidelines had been updated with more accessible language.

A public consultation took place between March and April 2021, with respondents including actuaries, asset managers, pension fund industry representatives, academics and unions.

Beyond annuities

Changes made include removing a reference to target retirement incomes in the context of a policy message on the theme of coherence, and broadening a proposal about efficiency and costs to be inclusive of products for both the accumulation and pay-out phases as well as to emphasise the term ‘cost-efficient’ in addition to ‘low-cost’.

A revision of a message relating to the design of the pay-out phase, meanwhile, in particular how to mitigate the longevity risk for pensioners, “broadens the focus of the existing message from annuity products to include all design options that can protect individuals from longevity risk, and recognises the value of flexibility with respect to pay-out options”.

The old headline message about the design of the payout phase was: “For the payout phase, encourage annuitisation as a protection against longevity risk”. The new one states “Ensure protection against longevity risk”, also adding that “lifetime income can be provided by annuities with guaranteed payments for life or by non-guaranteed arrangements where longevity risk is pooled among participants”.

The OECD in Paris

The proposed new wording had initially said “collective” arrangements rather than “non-guaranteed”, but according to Antolin the word collective was dropped because it did not express the fact that they are “non-guaranteed” life time income arrangement and pooling risks among participants already brings in the collective idea.

The new policy wording also appears to acknowledge the emergence of drawdown as a solution by saying “flexibility could be provided by allowing for partial, deferred or delayed lifetime income combined with programmed withdrawals”.

‘Weather report’

Henry Tapper, a UK pensions industry commentator and fan of collective defined contribution (CDC) scheme design, interpreted some of the formulations in the OECD’s new recommendation as “a very radical view which has so far got very little traction in the UK”.

The formulations he highlighted are that “DC pension plans should provide some level of lifetime income as a default for the pay-out phase” and that lifetime income could be “provided by annuities with guaranteed payments or by non-guaranteed arrangements where longevity risk is pooled among participants”.

Asked if the OECD’s recommendations were radical, Antolin said “if by radical it means we’re taking into account different recommendations and approaches then he’s right”, but not if it denoted adopting an extreme position.

Tapper suggested the OECD’s new report was “not in itself, a turning point, more a weather report”. He said he did not think the phrases he had highlighted would have appeared in the recommendations had there not been a “change in the weather”.

“Nowhere is this weather changing faster than in Australia, where the management and monitoring of longevity is now a part of retirement modelling for its DC superannuation system,” he wrote on his blog.

Next steps

The OECD recommendation for the good design of DC plans will be formally launched at the June meeting of the think tank’s WPPP, which is primarily responsible for the drafting of the recommendation.

It will then be used to provide technical assistance and policy guidance to OECD member countries and adhering non-members. The Insurance and Private Pensions Committee, through the WPPP, will report on the implementation, dissemination and continued relevance of the recommendation to Council in 2027.

A recommendation is the second ‘highest’ type of legal instrument that the OECD adopts, after “decisions”. Recommendations are not legally binding but represent a political commitment to the principles they contain and entail an expectation that adherents will do their best to implement them.

More information about the OECD’s good DC design recommendation is online.

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