Employers should “look beyond just repairing ‘broken’ defined contribution (DC) pension provision", WTW has said.

In its white paper, Reimagining Pensions, WTW outlined four strategies for replacing DC pensions with solutions that would, it said, “help employees achieve better outcomes, without employers having to shoulder the risks associated with traditional defined benefit (DB) plans.”

The first of WTW’s proposals was a whole-of-life collective defined contribution (CDC) approach that, according to WTW, would see risks shared between members and provide “pension income rather than pots at retirement".

Pension levels would depend on fund performance but, the firm said, for the same contribution cost a whole-of-life CDC could provide a pension 55 per cent higher than annuitised DC savings.

WTW cited Royal Mail’s scheme, which launched as the UK's first CDC scheme earlier this week (7 October), as a potential blueprint for such a plan.

The second proposal is a DB pension with variable increases, which WTW's modelling suggested could increase retirement income by 35 per cent, compared with DC with annuity purchase.

“There is no reason in principle to prohibit employers from offering, for future service, new variable pensions which are DB only to the extent they are guaranteed not to fall,” WTW said.

The group also suggested using DC pots to buy CDC retirement incomes, arguing that this would be the “least disruptive approach for employers with existing DC plans,” as it would allow schemes to provide a CDC retirement income option.

Finally, WTW outlined a plan in which contributions would build up a “cash balance ‘pot’” with targeted annual increase.

In what WTW called ‘variable cash balance with CDC in decumulation,’ actual increases would depend on investment performance, but the pot value would not be able to decrease, providing more certainty than DC schemes.

Both this and the previous proposal, according to WTW’s modelling, could bring outcomes of around 40 per cent higher than DC with annuity purchase.

WTW head of retirement practice in Great Britain, Rash Bhabra, said: “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, Bhabra added: “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.”

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