Defined contribution (DC) pensions in the UK are "out of date" and "not fit for purpose", independent pensions expert Dr Ros Altmann has warned in a report.

In 'Pensions – Time for change', Dr Altmann highlighted concerns over the Government's plans to revitalise retirement through auto-enrolment and warned that those enrolled onto schemes face "significant risk" of inadequate pensions as most do not guarantee future pension incomes.

Dr Altmann said that it is no longer applicable to adopt a one-size-fits-all approach; instead advisers need to look at a wider range of investment and retirement income solutions.

"Defined contribution pensions are not fit for 21st century lives. New thinking on both pensions and retirement is urgently required and those who want the best chance of better incomes will need to plan carefully for the future," Dr Atlmann said.

According to research from MetLife, which sponsored the report, 60% of pension saver do not understand or do not know whether they understand the risks they face in DC pensions and that this rises to 75% among 18-24 years olds.

Additionally, only a third of financial advisers believe that their clients will achieve target retirement income.

Despite the drive to recruit new pension savers into the auto-enrolment initiative, the report warned that most people will be contributing to pensions schemes which do not guarantee future pension incomes, leaving workers at the mercy of markets and annuity rates.

The current system is too inflexible and Dr Altmann argued that the new options should recognise the changes in working life and the increased uncertainty of investment markets.

She said: "As retirement becomes a process rather than an event the need for different options for both investment and income streams is growing.

"Planning flexibility is ever more important and it will also be necessary to find approaches which offer better late life income prospects that can be provided by standard annuities."

In the report, Dr Altmann compared the options for retirement income and explained why considering guaranteeing pensions can be an important part of the retirement income decision.

Dominic Grinstead, MetLife UK managing director, said: "The need for innovation in retirement planning is vital and advice is an essential part.

"Dr Altmann's report is an important contribution to the debate on the future of UK pension provision and MetLife is committed to playing its part."

First published 14.10.2013

monique_simpson@wilmington.co.uk