IRELAND - Defined contribution (DC) pension schemes such as the UK's incoming National Employment Savings Trust (NEST) save pension-holders from making the wrong decisions, according to Justin van de Ven, an economist at the National Institute of Economic and Social Research (NIESR).

In research presented in Dublin yesterday, van de Ven reported that there was a stronger welfare justification for DC schemes where there is myopia - inconsistent decision-making.

He said that the setup of NEST could easily be duplicated in other countries and compared DC schemes with saving clubs that locked in contributions for a defined period, but on a larger scale.

"Some people will be tempted to go to the pub with the money they need at the end of the week to buy groceries. You can see how, if you're susceptible to inconsistency, you might find it advantageous to lock money away."

He said an economic model predicated on rational economic agency failed to take into account the tendency to behave inconsistently, especially when it comes to retirement saving.

"It is an important aspect to take into account," he told IPE. "When you look at the policy papers, there's an indication that this is an issue. But if you look at economics journals, there's almost no mention of it.

He added: "Economists tend to be very sceptical about experimental work. For every experiment proving that people see investing in pension schemes in a certain way, for example, they could design one that proves that everyone wants to kill their grandmother."

Asked whether he believed auto-enrolment would effectively save pension holders from the tendency to delay saving for retirement, he said schemes such as the UK's NEST were effective in targeting people who should be participating in the scheme.

"Pre-commitment makes them easier for them to save. I have no stake in NEST but I like it. It's well designed."

One of the advantages of the NEST scheme, he said, is that it minimises the cost of administration. "In private-sector schemes, you might get 5% but someone's knocking off 1.5% of it," he said.

NEST's initial fees are 1.8% annually for contributions and 0.3% annually for management.

He pointed out that NEST pension-holders would still pay on average 4.5% of capital to convert their pension pot into an annuity but that this was "part of any pension fund".
 

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