The future of defined contribution remains uncertain, but changes need to be made, argues Steve Delo
The future of DC is so difficult to call. At one extreme, the future of DC could actually be DB - after all, the inherent weaknesses in the DC concept are such that the challenges at member level may never be satisfactorily dealt with.
DC is a paradox wrapped in an enigma: building a decent pension pot requires the member to take risk but risk can result in adverse outcomes and adverse outcomes can deter the member from taking any more risk thus ensuring they have a disappointing pot at retirement!
So much about driving decent DC pension outcomes requires counter-intuitive thinking that we struggle to conceive of a way to get such a message across to the masses in a “cut through” way.
Hence, in this scenario, we end up with confusion, mass member disappointment, inefficient use of employer capital and disgruntlement from those members whose outcomes are less good than their peers.
The future of DC is so difficult to call”
Employers and trustees then get bogged down dealing with complaints and disputes, the associated legal and advisory costs ratchet up, employees spend too much time in pensions presentations and the drain on management time becomes unacceptable - so somebody cries “Why don’t we just guarantee a benefit for everybody and underwrite it and save all this bother?!” and the whole pensions circle of life will start again!!
At another extreme, stand alone DC disappears before it disappoints as it is subsumed into wider savings vehicles. The LISA may prove to be the “thin end of the wedge” catalyst for this to happen and before you know it everybody has a personal investment package that encompasses mortgage offsetting, financing life events like weddings and university fees for kids, underwriting downside like events like illness and redundancy, facilitating career break and sabbatical income support.
Of course, there remains a potential middle course and I think that is the furrow we are currently ploughing in the industry”
And then, in the unlikely event any is left when you are then too tired or unproductive to maintain a job, it might help top up whatever state pension provision looks like (or form a bridge to the date it becomes payable). I doubt much will be left for the care home.
Of course, there remains a potential middle course and I think that is the furrow we are currently ploughing in the industry. The scenario where there remains some discrete DC pensions saving which is the best you’ll get from an employer.
The future here is all about buffing this up as best we can, trying to nibble away at the outliers of risks and nudge members towards practices that are broadly (a word we’ll be using a lot) in the interests of the typical/average (other words will use a lot) member whilst continually encouraging, as best we can, members and employers to pay in a bit more than they’d like to pay in the interests of cushioning them to some extent against the eventual disappointment.
I hope we might even be able to trim some bureaucracy along the way, stripping out some of the pages of disclosure waffle we have to issue and maybe, just maybe, kindle some genuine passion for retirement saving. Oh, to be the chair of trustees who can put his name to a communication document that members will actually be eager to receive and properly prepared to act upon!“
Steve Delo is chief executive of PAN Governance and former president of the Pensions Management Institute