Andrew Brown, client director at Columbia Threadneedle, talks to Sara Benwell about what lies in store for DC pensions
How have DC pensions fared over the last twelve months?
The industry has undergone massive change – but there’s still much to do as schemes continue to look for solutions that achieve better member outcomes.
That said, 2015 was a year of considerable accomplishment. There are more savers, more products and providers are innovating.
People seem generally more aware of pensions, perhaps a result of going through the auto-enrolment process and also the positive impact that ‘freedom and choice’ has had.
2015 was a year of considerable accomplishment”
I’d like to think that sentiment towards pensions has moved in the right direction to become a more attractive long-term investment vehicle.
What we’ve also noticed, which is quite striking, is that DC has certainly been getting a lot more attention from trustees than it has in the past. It’s no longer the ‘poor relation’ of defined benefit fund assets.
What do pension schemes need to focus on in the year ahead?
Engagement is key.
We don’t know what a member’s situation is based on just one workplace pension pot. Members need to engage and have realistic goals in order to provide an appropriate investment strategy.
Most of us will have various employers over our working lifetime and various pension pots. Without pot follows member it’s difficult to consolidate and understand a person’s wealth situation.
Without pot follows member it’s difficult to consolidate and understand a person’s wealth situation”
It’s not just pensions. Members also need to take account of other forms of wealth in terms of savings, property and inheritance. That’s why it’s so crucial for members to engage.
At this point in time we have a minority of retirees relying completely on a DC pension pot. DC is still relatively immature, and people retiring on company pension schemes now are likely to have some DB provision. So it’s a market that’s still got to evolve.
What are the main challenges facing the DC world?
The main challenge facing the industry is the lack of member engagement with their pensions. It is a theme that continues to permeate year on year.
It obviously means we’re not doing a good enough job as an industry.
There’s a danger that members have unrealistic expectations of what their pension scheme will help them achieve in retirement, particularly if they’re making minimum levels of contributions.
Auto-enrolment has worked to get people in but they are by no means saving enough.
There is also a problem with the way that investment is communicated.. It’s important that members understand the relationship between risk and reward. Some people have an exaggerated perception of risk which can lead to reckless conservativism
Auto-enrolment has worked to get people in but they are by no means saving enough”
When we look at the other risks – an understanding of inflation, longevity and income requirement in retirement are all aspects of the education that’s needed.
As an industry we are doing a lot to address this but we can do more. We’re developing tools and nudging techniques to help members and their understanding.
It also needs to be pitched appropriately – retirees today being communicated to in a way that’s very different to young members entering a pension scheme tomorrow.
The industry needs to continue looking at how it communicates and the types of medium it uses.
What does the future look like?
I think this could be a defining year.
The upcoming budget has the potential to introduce further change, we might see transformation to the tax treatment of pensions and we have to hope that this is very carefully evaluated and implemented.
Aside from that there will clearly be an even greater focus on governance as trustees prepare for the new DC code.
I think we can expect further good work with regards to schemes and the way in which they implement solutions for their members in order to provide good outcomes.
It will be interesting to see how the very large number of small and micro-employers deal with their upcoming staging dates over the next couple of years.
In an ideal world I think the industry would appreciate a period of stability”
These are employers who do not necessarily have the resources, personnel and pensions departments that the much larger schemes have had throughout the auto-enrolment process - however it is a significant market.
We have a very large number of small businesses in the UK so it’s going to be interesting to see how they engage and how they implement their auto-enrolment solutions.
As members’ pension pots get bigger, as more senior professionals within businesses are reliant on DC pensions, the level of engagement and significance DC provision will continue to grow.
It’s hard to predict the future to some extent given that we seem to be on the cusp of change (in recent years).
In an ideal world I think the industry would appreciate a period of stability so that we can come to terms with auto-enrolment, with freedom and choice, and just get on with providing excellent service to members.