Pension savers "do not understand the risks" of DC pensions, according to new report

Dr Ros Altmann, an industry expert and author of the report, said that the figures showed that the Government's high profile automatic enrolment programme was "not fit for purpose". She said that the approach, which assumes that savers will buy an annuity at a pre-determined retirement date, "does not fit anymore" given falling annuity rates and changing attitudes to retirement ages.

"DC pensions are not fit for 21st century lives," she said. "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."

"As retirement becomes a process rather than an event the need for different options for both investment and income streams is growing. Planning flexibly is ever more important and it will also be necessary to find approaches which offer better later life income prospects than can be provided by standard annuities," she said.

An annuity is a policy from an insurance company that converts a pension fund, or part of a pension fund, into an annual income for the rest of the individual's lifetime. However, according to the findings of surveys carried out by insurance firm MetLife to inform Altmann's report, only one in ten financial advisers would buy an annuity for themselves at the current low rates. Gearing workers' investments towards annuity purchase would not therefore be the best value approach, she said.

Up to nine million people will begin saving more towards their retirement or saving for the first time under the Government's automatic enrolment programme, which began for the largest employers in October last year. The vast majority of those savers will be enrolled into DC schemes, under which the benefits provided on retirement depend on the performance of the saver's investment and final annuity rates.

In a report published in September, consumer protection regulator the Office of Fair Trading (OFT) said that some savers were not getting value for money from the £275 billion DC pensions market due to high charges on some older schemes, and low levels of trustee engagement and capability on some smaller schemes. It has agreed a number of reforms with businesses and the Pensions Regulator, and made a number of recommendations for further action.

Altmann said that standard investment options offered by DC schemes were "inadequate", and falling annuity rates meant that the benefits savers ultimately received were "likely to disappoint". In addition, the research indicated that more people wanted to work part-time in later life, with the majority of 50-60 year olds not expecting to feel 'old' before their 70s. This meant that gearing pension saving towards a specific future date was no longer appropriate, she said.

"Standard workplace pension schemes may be poorly designed for the future," she said. "The assumption of fixed retirement dates and switching to bonds to fund annuity purchase may not fit future retirement realities. Unless we address the inadequacies of the current pension fund default options and the scandal of poor value annuity provision, pensions are likely to disappoint."

Pensions expert Mark Baker of Pinsent Masons, the law firm behind Out-Law.com, said that employers that were doing their best to cope with the reforms "deserved some sympathy".

"It's certainly true that the timing of auto-enrolment has been unlucky, coming at a point when so many people just can't afford to pay more money into their pensions," he said. "It will take years before we know whether auto-enrolment is causing people to pay more into their pensions longer-term."

"One problem highlighted by the research is that someone paying into a DC pension has no certainty about what they will get out in 20 or 30 years' time. Products are becoming available that can help with this, aimed at drawing a stronger and more predictable link between money paid in now and the outcome at retirement. These products don't remove the need for a longer-term debate, but they might be of value to employers looking to do the best for their workers – and, crucially, the extra predictability might persuade some individuals to pay more money in," he said.

According to Metlife's research, 67% of savers would be likely to save more into a pension scheme that guaranteed their capital. 72% would be more likely to save into a scheme that guaranteed income on retirement, it found.