Sunday, 24 September 2017

    DC membership: the good, the bad and the ugly

    DC scheme membership has taken over DB for the first time, and that’s not necessarily good news, says Jenna Gadhavi

    Total memberships in defined contribution (DC) pension schemes have for the first time overtaken defined benefit (DB) schemes, according to a report published by the Pensions Regulator (TPR) last week.

    This indicates a key tipping point, and shows that in the private sector at least, DC schemes are the pensions of the future. But how bright is that future for today’s pension savers?

    house and money

    The good

    Andrew Warwick Thompson, executive director for regulatory policy at the Regulator was quick to point out the positives: “This transformation is the direct result of the success of automatic enrolment which has seen more than 7 million workers join a pension scheme for the first time.”

    Great news on face value, but beneath it lies a big problem.

    The bad

    Auto-enrolment is a step in the right direction, there is no denying that. But with DB pension schemes tending to be far more generous than DC schemes currently are, the future looks bleak for many savers.

    The future looks bleak for many savers.

    With the responsibly now falling on individuals rather than their employers to save enough for retirement, the current statutory minimum legal requirement of 1% employee and 1% employer contributions (rising to 5% and 3% respectively) just isn’t good enough.

    For those nowhere near retirement age, getting on the property ladder, starting a family or simply living in the here and now take precedent. No one likes thinking about old age, and putting money aside that you won’t be able to access until your 60’s at best (but probably a lot later, the way the average retirement age is going) is not appealing.

    The result? Future generations struggling to get by on meagre pensions because we aren’t doing enough to encourage higher contributions NOW.

    The ugly

    To add to this, there still seems to be great fragmentation in DC provision, meaning that governance standards can vary greatly.

    The Regulator’s annual DC Trust report shows that there are now 34,500 DC schemes in the UK. Most of these - 32,000 schemes - are ‘micro schemes’ with between 2 and 11 members, and of these around 23,000 are ‘relevant small schemes.’ Relevant small schemes are subject to minimal legislative duties, compared to those applicable to larger schemes.

    What is concerning is that of the 750 DC schemes being used for auto-enrolment, more than half fall into this ‘micro scheme’ category.

    This means that there will be many DC savers at risk from sub-standard governance and administration – and unable to do anything about it. This could greatly reduce their incomes in retirement.

    Ultimately, the industry has the fate of future retirees in their hands.

    It is vital we educate individuals on just how much they need to save to fund the lifestyle they expect in old age, and make sure the schemes they pay into are well run.

    Readers' comments (1)

    • “Noting the points made in the article about small DC schemes, it is worth recognising that not all small DC schemes are poorly governed, however for many, there may be benefits in moving to a master trust. There are currently 87 master trusts, so there is a wide range to choose from and some are better quality offerings than others. For companies making this move it is vital that they do proper due diligence on master trust providers and the master trust assurance framework should help this. Once a master trust is appointed, however, it should not be ‘set and forget’ as employers will want to continually make sure they are getting the best ‘bang for their buck’.”

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