The UK’s version of the defined contribution (DC) pension system “is not a pension” as it fails to account for the true “purpose” of a retirement arrangement, according to a report sponsored by Pension Insurance Corporation (PIC).PIC tasked David Pitt-Watson – executive fellow of finance at London Business School and co-founder and former CEO of Hermes EOS – and Hari Mann, professor of strategy and innovation at Ashridge Business School, with defining the “purpose of a pension, and what institutions would be best designed to fulfil that purpose”.After setting out the purpose of a pension and defining it as a collective arrangement, Pitt-Watson and Mann defined a pension as a collective arrangement, meaning that the DC system was “not a pension”.The lack of collective defined contribution (CDC) pensions in the UK was an example of the extent to which the financial system had been designed without taking purpose into account, the authors added. Introducing such a system would represent a step towards “a more purposeful financial system”, Pitt-Watson and Mann said. Danish or Dutch institutions like ATP, ABP or PGGM, they argued, came “pretty close to the characteristics we have laid out for a purposeful pension fund”. The CDC system in Denmark and the Netherlands “is recognised as extremely effective in fulfilling the purpose of a pension”.“In the UK, CDC pensions are effectively illegal, as regulations have been put in over many years, each aimed at some form of consumer protection, which prevent the flexibility needed for such pensions to operate,” Pitt-Watson and Mann added. “In establishing these, regulators were doubtless acting in good faith. Sadly they failed to start by thinking about “the purpose of a pension”, or the governance necessary to make such a purposeful system work.”Pitt-Watson’s and Mann’s paper is the first in a series that PIC intends to produce with partners investigating the purpose of the financial services sector.Tracy Blackwell, CEO of PIC, said there had been an increasing focus on culture in financial services since the 2008 financial crisis, but culture “might in fact be entirely the wrong place to start”.“In our view culture comes from purpose, and therefore the right place to begin is to define the purpose of finance,” she said. “Culture is the ‘how’, but purpose is the ‘why’.”Blackwell added: “We at PIC do not have the answers, but we believe that now is the right time to have a wider discussion around the need to refocus on the ‘Purpose of Finance’.”The full paper, “Why Finance Matters: Building an industry that serves its customers and society”, is available here.