DC workplace pensions are a cornerstone of pension provision for millions of people in the UK and over the next few
years will become the primary retirement vehicle for the private sector, and possibly even the public sector.
The problem is not DC as a means of funding retirement; rather it is caused by low contribution levels and immature
approaches to scheme design and communication.
This supplement addresses many of the issues facing DC, specifically the investment conundrum and how DC
investments, communication and scheme design are evolving.
There is lots of good news which, as an industry, we should be proud of. Lifestyle strategies have, for the vast majority of older workers, protected their accumulated funds from recent stock market volatility.
Workplace DC is changing and the industry is building new solutions to tackle many of the problems inherent within
early DC design. Automating scheme design ensures high participation levels, high employee contribution levels via
automatic increases and new default designs.
There is a growing acceptance that 80% plus of employees in the default fund is a success rather than a failure, as it’s
the right fund for the majority of employees who will not or do not want to engage with investment decision making.
The most recent evidence suggests that employees who opt out of professionally designed default funds and self
select their own funds reduce their accumulated fund wealth by 20%, this data from Vanguard in the US tracked 1 million investors in 401k arrangements. Indeed these investors did even worse than spreading their investments equally between available funds, the reasons being that members chase performance buying high and selling low and fall into
naïve investment decisions such as home country bias.
Even in the recent tumbling markets, members of schemes did not increase their active decision making, instead they
remained invested. If members haven’t actively managed their money in the past 12 months will they ever? There is strong evidence that at most, 10-15% of employees will engage in investment decision making.
New entrants are most susceptible to the background market fluctuations and are likely to invest more conservatively if
they join a scheme at a time of a falling market or vice versa, the problem is that they tend to remain anchored to that fund until they retire.
Designing and delivering new investment solutions based on the best ideas is industry’s (providers and consultants)
biggest challenge in the short term. This needs to balance modern investment design and communication strategies so
that it is suitable for the employee. In the medium term, modern holistic workplace savings solutions will emerge which combine accessible and non-accessible pension funds within a single wrapper.
At the same time we have RDR and Personal Accounts looming which will fundamentally impact the industry, the effects of which will be most profound. The default fund of Personal Accounts will create an unofficial benchmark, which is likely to have both positive and not so positive impacts. If the press start reporting the default fund’s monthly
performance, people will focus on the short term not the long and fail to understand some level of volatility is essential to secure the necessary growth to fund retirement.
As DC evolves, more of the communication effort and value add from advisers will be directed at engaging employees
on the benefits being provided by the employer. Mid and pre-retirement counselling services will re-emerge for those
employers who seek a better quality solution than Personal Accounts and more innovation will emerge at the
decumulation phase to remove the risk of unequal outcomes at retirement.
Many of the ideas discussed here are already, or will become, available in the market and DC will continue to evolve as the cornerstone of UK pension provision. It’s not rocket science, as an industry we know how to make it work; we now have to work together to deliver it.