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?
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.
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.
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.