Sara Benwell looks into her crystal ball to predict what lies ahead for DC pensions
I like a flutter as much as the next person. I’ll have a bet on the Grand National and maybe buy a lottery ticket. I wouldn’t, however, be willing to make many bets on the future of pensions – there are too many variables.
The industry has always been beleaguered by regulatory change, as politicians pick away at pensions tax relief to pay for grandiose election promises, but lately the intensity seems to have gone up a notch.
For the better part of a year we have been staring down the barrel of possible changes to the tax relief system that could fundamentally alter the nature of pensions. It now seems unlikely that we will have an ISA-style TEE system inflicted on us, but the constant ravaging of the lifetime allowance still leaves pensions in a bit of a pickle.
Senior managers, more disenfranchised with every slash to the LTA, will also be punished by a flat-rate tax relief system. And if senior managers don’t care - what incentive is there for them to provide high-quality, well-matched and expertly governed pension schemes?
The constant ravaging of the lifetime allowance still leaves pensions in a bit of a pickle”
We can reasonably expect more employers, even those at the larger end of the scale, to start seriously considering shifting their pension to a mastertrust. There they can benefit from greater scale, lower costs, and outsourcing all the day to day running of a scheme.
This might seem sensible, but there are over a hundred mastertrusts in the marketplace and not all of them are friendly. Even when you strip out the outright pernicious (assuming employers can spot these) it’s still tricky to identify the good ones that will stand the test of time.
And even if we can direct employers to the best of the mastertrusts, it seems likely that some of the more generous structures with matching that goes beyond government requirements will disappear. Is a CFO really going to shell out for a scheme that matches up to 10% if they have hit their lifetime allowance?
This is deeply concerning – as we all know that people need to save significantly more (even than the 8% auto-enrolment is heading towards) to generate an adequate income in retirement.
There are over a hundred mastertrusts in the marketplace and not all of them are friendly”
It seems clear that people will need to work longer, but even if business practices change to make that a reality – people retiring at 80 may still need to fund up to 20 years of retirement, no mean feat. Communications will be crucial in helping people to achieve this.
And with the new freedoms we need to educate people about how to make their funds last when they do retire.
Different retirement plans need wildly different investment strategies sitting behind them and many lifestyle strategies have been rendered obsolete by the changes. Schemes should be looking to better segment their data – which will help them understand which ‘default’ path they can place members on. A journey to drawdown should be poles apart from one which ends in a cash lump sum.
An even better solution would be for schemes to not just communicate at members but also engage with them. If you can find out what a member is planning – you can invest accordingly.
Rumours abound that we may see an even lower charge cap”
Creativity – not something often associated with pensions – will also be paramount. Rumours abound that we may see an even lower charge cap and this will force smaller schemes to have a long, hard think about how they can achieve the scale needed to invest wisely while reducing costs.
Governance will continue to be centre stage as the new DC code comes into force and trustees are going to have an awful lot on their plates. So much in fact – that doing it all is likely to be impossible.
And we can expect further disruption from the government, beyond that which is already planned. In fact, one pensions bet that I am willing to make is more change ahead.
Schemes will have to react accordingly. The future will be about balancing the shifting priorities and working out what needs to happen now and what can be put off until later.