DC - a management tool?

Many employers have regarded their pension scheme as a management tool, helping more experienced staff achieve a comfortable retirement thereby opening the door to newly qualified employees.

Demographic shifts in the past 30 years mean future generations will not be as wealthy. Younger people will need to work longer and, with the State Pension Age expected to rise to 68 maybe as early as 2037 (less than 20 years’ time!), does this mean fewer opportunities for the newly qualified?

The Pensions Regulator tells us 9.9m workers have been automatically enrolled to October this year. With 98% of employers using a defined contribution (DC) scheme for auto-enrolment, contribution levels and investment choices are more important now than they’ve ever been if people are going to be able to retire comfortably.

Pension contributions? Just not high enough…

As predicted median pension contributions have decreased since 2012, but will now increase as minimum auto enrolment contributions step up. Still, these will never be ‘enough’. According to the Pensions Policy Institute (PPI), for a median earner 8% of band earnings paid from age 22 to State Pension Age would only have a 50% chance of achieving the same standard of living in retirement as in working life. 11-14% would increase the chance to 66%! I don’t think we are getting this message across.

Investments? Never have been understood… and never will?

Interestingly, the PPI also tells us 99% of DC master trusts members are in the default fund but only 62% of members in a group personal pension (GPP) are. Are GPP members being better informed? Yes, it’s true a great deal of work has been done to improve default funds in recent years to try and help members receive better outcomes. However, £3,902m sat in a default doesn’t shout engaged members at me.

Employees want help

According to State Street, 64% of the working population want employers to help them with retirement planning, with awareness of options the most common request (80%). In the same study, 60% said they would like consultation or advice but only 45% of those planning to retire in the next 5 years had actually sought advice from an IFA.

That is one education gap that needs filling, and here’s another. Only 30% of retirees took an annuity but over 70% those approaching retirement would value an income solution. ABI figures show in 2017 76% of annuity contracts were taken without advice, whilst 64% did take advice on drawdown (meaning 36% didn’t!).

Whether it is IFA advice, a PensionWise appointment or simply better education tools from providers, good retirement planning for people accessing DC pension savings is vital. Vigilance is needed to test IFAs and providers deliver through chosen drawdown investment vehicles and to ensure members receive proper value from the considerable investment expenses taken from their retirement funds.

With the focus now firmly on DC pension schemes to deliver retirement solutions, the Pensions Regulator is proposing a package of remedies to improve engagement and enhance outcomes, including new ‘investment pathways’ to help investment decision making.

Much of our work on DC governance committees has been on enhancing member understanding of their pension plan. Using a variety of media - interactive booklets, websites, nudges, postcards, the power of smartphones, worksite presentations, benefit fairs and developing a learning culture between groups of employees as ‘pensionpals’ - really does help.

We welcome the PLSA’s recent report 'Hitting the Target: A Vision For Retirement Adequacy' and look forward to its research next year into the development and adoption of Retirement Income Targets. At their recent conference, the PLSA looked at an Association of Superannuation Funds in Australia report that presented contemporary budget standards for retirees. These indicate how much a particular family living in a particular place at a particular time needs in order to achieve a particular standard of living. It is derived by specifying every item that is needed by the family and each of its members - from the clothing worn, to the food consumed, soap used, petrol bought, bus fares paid for, furniture sat on, haircuts and holidays taken - then pricing each item and summing to produce the overall budget. I believe budgeting is an important part of retirement planning and we should be encouraging people to do this more.

Creating powerful communications is one part of a successful DC governance programme. As employees develop enlightenment in pension investment, a retirement saving culture can be created and pension schemes can again be an employer management tools for the development of their business and their staff.

 

 

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