The Pensions Institute has published a set of "good practice" principles for modelling defined contribution (DC) schemes.

The Good Practice Principles in Modelling Defined Contribution Pension Plans is designed to help pensions providers design better pension plans.

The Pensions Institute is holding a consultation on the principles until May 31, and a final version of the modelling principles will be published in June.

Professor David Blake, director of the Pensions Institute at Cass Business School and a co-author of the principles, 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."

He added: "A well-designed plan will therefore be designed from back to front, that is, from desired outputs to required inputs."

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

"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," said Blake.

According to the institute, the principles are based on more than a decade of research and are consistent with the recently published OECD guidelines for designing DC pension plans.

The principles meet the European Insurance and Occupational Pensions Authority's (EIOPA) set of good practices on information for DC plans.

Professor Kevin Dowd, a fellow of the Pensions Institute at Cass Business School and another co-author of the principles, said: "Applying these principles 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 27.03.2013

monique_simpson@wilmington.co.uk