Until 20 years ago most people were pensioned through a final salary or some such sort of pension scheme. In the mid-eighties money purchase pension provision was reinvented and started to grow. It is now the dominant form of pension provision for employees of any company other than the largest.
Someone retiring now, with any form of pension provision, might, reasonably, have 20 years of DB accrual and 20 years of DC accrual. Retirees from here on will have a majority of DC accrual.
From next year, employers will start to participate in Nest. Mercer recently surveyed its clients and found that the majority of them were planning to opt out and provide an alternative pension vehicle.
Anecdotal evidence suggests that this will be a common reaction amongst employers across the spectrum of company sizes. This means that the number of DC schemes and employees covered by them is set to expand rapidly and significantly.
As an industry we have not been good at serving the DC community. In fact we have been very poor at serving it
DC schemes have long been the poor relation when it comes to governance. Of course, there is no legal mechanism for any governance in a contract based scheme and maybe this is something, in itself, that needs to be addressed.
The regulator’s guidance on DC work place pensions sets standards for contract-based as well as for trust based pension schemes. It is rumoured that the FSA is also tightening the application of the ’treat customers fairly’ rule for those subject to its regulation. The RDR which will end, amongst other things, the practice of paying commissions on retail pension products will also cause behavioural change. There is a different, more honest, more straightforward way to achieve good member outcomes. The government needs to regulate to create a direct and obvious fiduciary duty for the good governance of contract-based pension schemes.
But even in trust-based schemes experience has been poor. That this is so is evidenced by the regulator’s fifth scheme governance survey. Amongst other things this records that only 63 per cent of schemes have reviewed their statement within the last three years, which means that 37 per cent haven’t, 11 per cent of DC trustees didn’t know what proportion of their members were in the default fund and 17 per cent of DC trustees have never reviewed their retirement process.
With more people retiring with or largely reliant on DC pensions and with the poor track record of governance, as well as the impact of generally too few contributions having been paid, we are about to have a pensions train crash. Retirees with no fallback DB scheme will realise that their DC provision is inadequate and has been poorly managed.
Things will have to change. The regulator knows this and has already started to raise the bar through publishing reams of material on delivering “good member outcomes”. Much of this focuses on process in areas such as monitoring costs and performance and member communications.
But, laudable and necessary as this is, process improvements alone are not enough. As an industry we have not been good at serving the DC community. In fact we have been very poor at serving it. DB has been where the money is, and so that has been where the intellectual capital has been invested.
That capital needs to be refocused, on the DC community. We need innovative ideas in the areas of accumulation and decumulation of pension wealth. We need to be creative with the aim of making the process more efficient and reliable for the member. We need to make their money work harder and more successfully for them. This shouldn’t be rocket science.
There are many investment features of DB that can be carried across to DC, concepts like dynamic de-risking and down side protection, that can reduce the number of ’moving parts’ for DC members making the process easier to understand and more predictable.
In communications, a key part of the governance process, the focus should be moved from input “what do you want to pay in” to output “what pension do you need and how much risk can you take of not receiving that income”.
We are at a tipping point caused by a convergence of change: a greater reliance on DC in the future, a significant increase in the number of people in DC as a result of Nest and auto-enrolment and the needs of the industry to re deploy its efforts. The change will be dramatic and sudden but it is coming.