DC pensions could be well-placed to support modern flexible retirement needs and should no longer been seen as inferior to DB provision.
This was one of the key messages of a presentation at the Corporate Advice Master Trust and GPP summit, delivered by Legal & General Investment Management’s head of DC investments, governance and proposition Jesal Mistry.
However, Mistry said that in order to achieve this, there needs to be both systemic and behavioural change, to boost pension contributions and enhance participation rates, particularly among under served groups.
Mistry outlined the current gap between retirement expectations, and the reality for the majority of savers in the UK. A key factor in this is current contribution levels – and Mistry highlighted the differences in contributons rates between DC and DB schemes. “If you put in 20, 25, 30 per cent of your contributions into a DC scheme like DB schemes had to, then actually you’d be in a very different place,” he said.
Too further compound this problem Mistry pointed out that thanks to the phased introduction of auto-enrolment contributions means many savers have only been contributing at the 8 per cent rate for a few years. This delay exacerbates the challenge of building adequate retirement savings he said.
Mistry said that current 8 per cent mandated AE rate remains inadequate, and called for the government to address this issue. He also said there was an urgent need to broaden participation, with the self-employed and those on lower income thresholds remaining outside this system. “We are 16 years on from the Pensions Act of 2008, and not much has changed,” he added.
Mistry said that while broadening AE could bring many more people into this savings net, he said there was also a need to address current gender and ethnicity gaps in pension savings for those who are part of the AE system.
“We see, for instance, that the median pension pot for ethnic minorities is about a third of their white British counterparts”. Mistry says that overcoming these gaps requires targeted education, culturally appropriate financial products, and broader efforts across the industry to increase trust and engagement with pensions. This would include offering a wider range of Sharia options, for example, to address the savings needs of the growing Muslim population in the UK.
Mistry said that was also a need for more innovation in in DC pension investments, particularly by exploring opportunities in private markets. He challenged the long-standing focus on cutting costs, arguing that a slightly higher expense ratio could lead to much better outcomes, particularly if it is investing in assets that deliver higher yields.
He highlighted the benefits of particular private market investments, such as affordable housing and renewable energy projects, which not only offer diversification and returns but also resonate with members’ values. “If it’s in their interest today, should trustees ignore it completely?” he asked.
Mistry concluded by reaffirming the potential of DC pensions. Challenges exist, he said but by addressing contribution adequacy, closing equity gaps, leveraging investment innovation and expanding inclusivity, the industry can build a robust and adaptable DC system, to meet today’s and tomorrow’s retirees’ needs. This he added can help bridge the gap between people’s expectations around retirement and the reality.
“If we get it right, we can overcome these barriers,” he said. “DC pensions aren’t inherently bad — it’s how they’re structured that needs to change.”
