Maggie Williams looks at research into the way defined contribution will continue to eveolve
“Unravelling workplace pensions” is the subtitle of the Pensions Policy Institute’s (PPI) second Future Book, looking at trends in DC saving.
What’s in a name? Does the report untangle the unknowns of occupational DC pensions, or is ‘unravelling workplace pensions’ the one-line executive summary? Based on the findings, either could be true.
First, the good news. According to the PPI’s research, the median size of a DC pension pot at state retirement age is projected to grow from its current level of £26,000, to around £49,000 in 20 years’ time. The bad news is that by 2036 those with income from DB pensions to bolster that DC pot will be rare beasts.
If we don’t do something about these figures, we have to ask if we are currently at peak pensions
Toby Nangle, global co-head of asset allocation and head of multi-asset EMEA at Columbia Threadneedle, raises the spectre that this could be as good as it ever gets. “If we don’t do something about these figures, we have to ask if we are currently at peak pensions income,” he cautions.
If a median end-of-working-life pension pot of £49k wasn’t a stark enough indication of just how little employees are saving, average contribution rates and pot sizes in DC are falling. The PPI believes this reflects the influx of people joining DC pensions through auto-enrolment and that, in time, both figures will start to rise again.
While much is still to be done to encourage people to save into pensions, the PPI’s exploration of the relatively uncharted waters of retirement choices shows equal cause for concern.
Drawdown and cash are the short-term winners from freedom and choice. More people are now withdrawing savings as cash lump sums than using drawdown or annuities – but more money is being spent on drawdown products.
The current appetite for cash could be related to pot size. The average withdrawal is £14,500 – realistically too small for annuitizing or drawdown.
Current spending on drawdown products could be a clearer indication of future trends. The average pot size invested in drawdown is £67,500, and the number of sales of drawdown products soared from 40,000 new sales in 2014, to 75,000 new sales in 2015.
More concerning is the way in which members are making decisions about their retirement income. Running in parallel with the shift towards drawdown is a move away from using independent advice. Those taking independent advice when entering drawdown fell from 81% in 2014 to 69% in 2015 – and when buying an annuity, that number now sits at a mere 20%.
We need to create a social norm of people asking questions about pensions
If the experiences of the Pensions Advisory Service (TPAS) are any indicator, people are in need of much more support. Michelle Cracknell, chief executive at TPAS (pictured) says: “We need to create a social norm of people asking questions about pensions. There needs to be more promotion of guidance and the industry needs to work better together to help people to save.”
She adds that TPAS sees “very few people asking questions about investment – partly because people don’t know that their pension is invested.”
It’s not just about the framework, it’s also how you do it
“We need to follow through into the decumulation sage and help decision making there,” adds Chris Curry, director of the Pensions Policy Institute. “It’s not just about the framework, it’s also how you do it.”
Cracknell concludes that the answers are as much to do with behaviour as to do with investment. “It’s important that we move people from being recipients of pensions to participants in pensions,” she says.
Making that shift will not be easy, but it is one of the key factors that could stop pension savings from really unravelling. The PPI’s research gives a picture of work in progress for DC pensions. The early years of auto-enrolment and more recent freedom and choice changes make it difficult to discern clear, long-term trends yet. But the to-do list is there for all to see.