(October 24, 2011) — The new National Association of Pension Funds (NAPF) chairman Mark Hyde Harrison has asserted that the pension system in the UK’s private sector is ‘significantly flawed’ and will leave too many savers with measly retirement pots.

In his inaugural speech, the new chairman of the UK’s leading pensions body warned that the structure of ‘defined contribution’ (DC) pensions in the UK are inefficient and wasteful. “The current system is a mess, and what’s really worrying is that over the coming years millions of people will be brought into it,” he said in his speech. “We need a radical rethink of the way we ‘do’ pensions in the UK. If we don’t, then too many people will save into a pension only to find themselves shortchanged in their retirement.”

Hyde Harrison added: “We must move from today’s significantly flawed structure to a world of large, efficient, well-run and low cost pensions which are run in the interests of savers.”

In the UK, DC pensions have largely replaced final salary, or defined-benefit (DB), pensions in the private sector. According to the NAPF, their importance is set to balloon ahead of new government rules that will force all workers to automatically enroll into the system.

As outlined in a release by NAPF, Hyde Harrison noted four major flaws with the current DC system in the UK:

1. DC pensions are too small scale, and too numerous. This creates massive inefficiencies and leads to higher costs, weak governance and poor administration.

2. Information about costs and charges is far too opaque. If the pensions industry was more upfront about them then charges could be driven down.

3. Savers’ interests are overlooked because employers and pension providers are not really batting for them, which can impact investment returns and the governance of a pension.

4. The average worker has too many ‘pots’ and finds it overly bureaucratic and difficult to pool them together. This can leave unwatched pensions languishing in low performing funds, or being eroded by high charges.

Looking ahead, Hyde Harrison asserted that the future of DC pensions would be strengthened by converting schemes into Super Trusts, or pensions that run immensely larger in scale. “They would allow, for example, a small employer to join an existing pension structure with 1,000s of other members, rather than setting up its own small-scale scheme,” NAPF stated in a release.

Hyde Harrison’s statements about the flawed nature of private sector pensions in the UK follow a new report on the other side of the Atlantic, which asserted that built-in economic efficiencies enable New York City public pensions to do more with less dollars. The report issued by New York City Comptroller John Liu showed that the city’s public pension plans are more cost-effective for employees compared to the private sector, with efficiencies derived from investment expertise and leverage as institutional investors.

The study showed that New York City’s pensions provide retirement income at roughly 40% lower cost than individual accounts, paying equal retirement benefits as those used in the private sector but at a significantly lower cost while enabling the city’s pensions to “do more with less dollars.”

“Defined benefit plans have enormous economic efficiencies over defined contribution plans,” said the report — titled A Better Bang for New York City’s Buck — by the National Institute on Retirement Security (NIRS) and issued by Liu.

The report by the Washington, DC-based non-profit organization demonstrated that DB savings are derived from three sources:

1) Superior investment returns: The pooled nature of assets in a DB plan results in higher investment returns, partly based on the lower fees that stem from economies of scale, but also because the assets are professionally — not individually — managed.

2) Better management of longevity risk: New York City’s DB plans save between 10% and 13% compared to a typical DC plan.

3) Portfolio diversification: The ability to maintain portfolio diversity in the city’s DB plans saves from 4% to 5%.