The decision to abolish mandatory annuitisation has the potential to undermine the success of auto-enrolment (AE), the Organisation for Economic Co-operation and Development (OECD) has warned.
It welcomed AE as a positive move for improving pension participation, but said coverage rates were better under compulsory systems.
According to its Pensions Outlook 2014 report, coverage in the private pensions sector had its first increase in a decade a year after implementation, rising from 26% in 2011 to 35% in 2013.
The proportion of people enrolled in a workplace pension also reached 50% last year, which was its first hike since 2006. Indeed, more people were saving into a pension in 1997 than in 2012 before AE took effect.
Although the OECD felt that AE would help create a more financially stable pensions system in the future, it raised concern that the freedom to cash in pots at retirement meant longevity risk was heightened.
Speaking at the launch of the report, social policy division head of pensions Hervé Boulhol said: "For the UK, the increase in the retirement age that is planned will go towards improving sustainability. Now there is the option to withdraw the full lump sum of the pension which may in the end put pressure on the public system."
Financial affairs division head of pensions Pablo Antolin said annuitisation was needed to protect people against longevity risk. "AE is going in the right way; extending the statutory age of retirement goes in the right way; but stopping mandatory annuitisation might create problems.
"We understand the message of the government that people know better than anyone else how to manage their own money; people can argue against this or not. But we believe and argue that we should have deferred lifetime annuities at retirement so you have the protection from longevity risk covered."
The experts said there was no way to manage individual longevity risk. Antolin added: "The problem with annuities is everyone looks at them as an investment product when in reality what you are buying is insurance against outliving your resources."
Previously, pensions minister Steve Webb revealed plans to ensure everyone spent two-thirds of their life in work and one-third in retirement, helping to manage longevity risk and the ageing population (PP Online, 20 February).
For every year of extended life expectancy, eight months would be allocated to work and four months to retirement, Webb said at the International Longevity Centre-UK (ILC-UK) report launch earlier this year.
Antolin agreed that this approach could work as long as it took account of all the factors influencing the pensions landscape. He said: "In general, it sounds reasonable. But you need the other parameters. You need to target the contribution rate and also bring in what you get from public pensions."
Overall, the defined contribution (DC) pension system faced adequacy problems which could be remedied by getting people to save more and work for longer, the OECD said.
It urged regulators to ensure pension funds regularly updated their mortality tables to ensure they had the most accurate data available, and proposed that governments issue longevity indices to help manage the uncertainty of future improvements in mortality.
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