November 28, 2008 / 5:38 PM / 11 years ago

OECD wants employers' help in pension investment

LONDON Nov 28 (Reuters) - Companies should help staff make the right investment decisions as employees play an ever larger role in managing their pensions, the Organisation for Economic Co-operation and Development (OECD) said.

In a review of its pension fund governance guidelines expected next month, it will recommend employers and financial supervisors fill a “governance vacuum” in pension schemes known as defined contribution (DC) schemes.

Under these schemes, the final lump sum accrued through investments depends on the contributions set aside and the market and employers no longer guarantee a fixed outcome.

These schemes are growing quickly in the UK and are the main offering in most continental European countries already, because they are cheaper to finance.

“Although in theory it (the scheme) is an individual contract, it is the employer who selects the provider and what the investment choices are,” said Fiona Steward, who is an pension expert at the OECD.

The new OECD guidelines are expected to be approved by the OECD Working Party on Private Pensions next week and published by the end of the year.

DC schemes can either be administered by an independent board of trustees, who make investment decisions and deal with fund managers, or are a contract between an individual and fund management service provider, chosen by the employer.

Under the contract option, the member must choose one of the options offered by the chosen financial provider.

Some 90 percent of DC scheme members fail to make a choice and end up in a default investment portfolio, a study by the Pensions Institute at the Cass Business School showed, and contract-based DC schemes are overtaking trustee-based ones.

To address this issue, the OECD will advocate employers to take over a fiduciary role advising employees and monitor investment performance, while engaging on behalf of employees, who would still take the investment risk.

The other options are getting financial regulators providing easy to find, user friendly information to compare and contrast providers performance and fees charged.

Steward cited Mexico as an example where the supervisor publishes performance and costs comparisons by fund, so savers can do their own governance. They can check if their funds are doing well and can switch if they wish, she said. (Editing by David Cowell)

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