Helping Pensions Europe in the DC debate

December 2015
Pensions Europe
We are very pleased to have helped Pensions Europe create their paper 'Pension design principles applied to modern defined contribution solutions'.

In 2014 Cardano published 'Principles of Pension Design' to help define what elements governments should take into account when designing a good defined contribution pension system. It is a quandary that has been considered many times over and there seems to be no simple answer.

Our extensive studying, and working with and learning from pension systems in different countries, has taught us good pension design depends on local context and cultural values. We produced 'Principles of Pension Design' to lay out the key considerations and are very pleased that our work has formed the basis of Pensions Europe's paper 'Pension Design Principles applied to modern Defined Contribution solutions' in November 2015.

The last decades have seen a gradual shift from traditional DB pension schemes towards DC pension schemes in the occupational pension systems of many European countries. In many other countries pensions have always operated on a DC basis. DC schemes offer flexibility and choice that allow members to adjust their private pensions to the flexible labour market and to their personal preferences while also ensuring the necessary control of costs.

Pension design should focus on how the design itself deals with human behaviour, how it ensures adequacy to pension needs at retirement in an uncertain world and, in some countries where it is required, supports risk sharing. Based on these universal principles, trade-offs reflecting the culture and historical development path of the country specific pension system can be made.

Behavioural Principles

Employees need to have enough freedom to choose tailored pension solutions. The following three behavioural principles help achieve the balance between offering choice and ensuring that employees are protected against undesirable outcomes.

  1. Keep it simple
  2. Provide sensible choices
  3. Under-promise, over deliver

Adequacy Principles

While absolute certainty is unobtainable in any form of retirement provision, a relatively stable level of retirement income is achievable with the right tools.

  1. Ensure adaptability
  2. Keep it objective
  3. Prepare for extreme conditions

Risk sharing Principles

A DC scheme can offer risk sharing between members based on the risk-reducing benefits of diversification, economic efficiency and fairness.

  1. Avoid winner/loser outcomes
  2. Only diversifiable risks should be shared
  3. Individuals must bear some risks

To read more about how these principles can define a 6 step model for an optimum defined contribution pension system please click here.