A set of 16 "good practice" principles for modelling defined contribution (DC) schemes have been published by the Pensions Institute at Cass Business School.

The first 15 principles, which cover concepts such as model specification and calibration; modelling member characteristics and integrating the pre- and post- retirement period, were in the initial consultation document released in March.

A final 16th principle was added as a result of the feedback received during the consultation period, which is that the model should be fit for purpose – covering an issue of necessity and sufficiency.

The principles, which are based on more than a decade of research, are published in a report called 'Good Practice Principles in Modelling Defined Contribution Pension Plans'.

Director of the Pensions Institute at Cass Business School and one of the co-authors of the report Professor David Blake said: "Most DC pension plans are currently very badly designed.

"If a DC plan was well designed, it would be a single, integrated financial product that delivers at reasonable cost to the plan member a pension that provides a high degree of retirement income security."

Most DC plans are not well designed because they are not modelled properly, as they do not take certain factors into account, such as the member's occupation or likely increases in life expectancy over the life of the plan member, Blake said.

He added: "The principles of good practice can be applied to develop more reliable and robust models. Projections from the models can then be used to more effectively guide both plan design and member choices."

The 16 principles are consistent with the recently published OECD guidelines for designing DC pension plans and also meet the European Insurance and Occupational Pensions Authority's (EIOPA) set of good practices on information provision for DC plans.

Professor Kevin Dowd Blake, a fellow of the Pensions Institute at Cass Business School and co-author of the report, said: "Applying these principle may have uncomfortable implications for plan members.

"They will often show that they will be making insufficient contributions to their pension plan or are planning to retire too early. They can therefore plan to do something about this before it is too late."

First published 17.09.2013

monique_simpson@wilmington.co.uk