PI asks a range of experts about the biggest obstacles the DC system faces in helping people get good outcomes from their pension savings

The DC system has a tough task meeting retirees’ income needs. But what are the greatest barriers that must be overcome?

mountain-climbing

CATHERINE HOWARTH, SHAREACTION,  CHIEF EXECUTIVE

Member representation in pension scheme governance is disappearing from the DC landscape; it’s happening rapidly and with barely a whisper of public debate.

The big beasts of tomorrow’s DC landscape are the dozen or so insurance companies and mastertrusts that have grasped most new business generated by the auto-enrolment legislation. Not a single one of these major providers has a scheme member sitting on either its IGC or its mastertrust board.

Outcomes for DC scheme members depend on contribution rates”

When it comes to governance, DWP attention is focused on the potential for rogue new mastertrusts to leave scheme members penniless. Serious as that problem is, the DWP should also engage with the potential for long-term member detriment as the UK abandons the principle that a third of the governing board of a pension scheme should have their own retirement assets in the scheme.

This artcle was taken from our special Pioneers of DC edition of Pensions Insight.  For more case studies of some of the most well-established DC schemes, read the full issue here.

Outcomes for DC scheme members depend on contribution rates, which in turn rely on savers trusting the system. Good outcomes also, of course, depend on investment returns, which require an alignment of interests between investment agents and savers themselves. Scheme members on boards can help to ensure both trust in the system and strong alignment of interests.

Experience overseas in the world’s top performing pension systems, notably the Danish, Dutch and Australian systems, provides powerful evidence of the benefits of having members on boards. In the 21st century, scheme members on boards should be paid for their time; should undergo obligatory, rigorous training; and should be subject to regular competitive elections that hold them firmly accountable to the interests of the membership.

RUSTON SMITH, TESCO GROUP, PENSIONS DIRECTOR

The first thing is encouraging people to think about their retirement, which is going to be very different. With the introduction of LISA’s and other saving products, and the move towards lifetime savings, it is much more holistic. So engaging colleagues and helping them to understand about how to provide for their retirement - and how much to save - is a challenge.

We’re focusing now on a really intelligent at-retirement proposition

The new space is at-retirement. At the moment my colleagues will primarily have DB pensions, but moving forwards DC will make up a higher proportion of retirement income. So we’re focusing now on a really intelligent at-retirement proposition that will meet members’ expectations and needs. Schemes need to look at how to create a default, with choices alongside it, that helps people get the best out of their lifetime savings during retirement.

NICO ASPINALL, INDEPENDENT CONSULTANT ADVISING INVESTMENT MANAGERS ON DC

The main challenge from an investment perspective is still designing and offering attractive products for individuals after they retire. While you can fill your drawdown account with a range of funds now, there’s none available that look anything like a pension, variable annuities or partially guaranteed products. After a certain age the vast majority of people just can’t deal with either complex decisions or asset volatility, but there’s nothing to replace annuities yet. This is a hugely attractive space, but one that managers and insurers have shied away from at present.

After a certain age the vast majority of people just can’t deal with complex decisions”

In the background is still the challenge of achieving reasonable returns in a low-growth world where asset prices are dominated by central bank policy. When you impose a regulatory burden which increasingly constrains high-value investment techniques, that’s not an immaterial challenge. While there has been a long trend towards passive management, a number of schemes are looking to do more than just buy the market and as they build scale they’ll be able to invest more into smart beta, actively managed products, and at the end of the day real assets, assuming the cap doesn’t come down too far too fast and stifle innovation.

Brexit has clearly added uncertainty, but from an investment perspective this is principally on the fund regulation side – will Irish and Luxembourg-based funds continue to be investable for DC schemes? Theresa May will tell us, but don’t expect this any time soon.

This artcle was taken from our special Pioneers of DC edition of Pensions Insight.  For more case studies of some of the most well-established DC schemes, read the full issue here.