The inevitability of DC

What are the major issues in DC right now?

After many years of people saying DC is coming, DC is going to be the future, we are now in what is much more of a DC context for the pensions landscape.
The big changes will be when defined benefit schemes close to future accruals. That will be the next big trend in the next two to three years. Then all employees – even senior and the highly paid – will be in a DC scheme, not just as a starting point to move into DB at a later date.
I think that will absolutely change people’s level of interest in DC. It is still seen as DB’s poorer relation but that will change over time.
At present it is clear there is more focus on DB because that is where the assets are and I can understand that mentality. For example, trustees of a £1bn DB scheme that also has a DC element will clearly be more focused on what is happening to the £1bn scheme. But members are getting more interested. We are seeing that pots are growing to a reasonable level. It has taken time for people to build up their pots.
If a scheme was started back in 2001-02 when the biggest levels of DB closures took place, those interests are now five and six years old – they have built up membership and built up assets. A lot of those scheme are now looking to review what they put in place when they were set up.


What do you think of the Conservatives’ proposals to close the MPs’ DB scheme and replace it with DC arrangements?

I think it would be a great thing. We need a much higher level of understanding of what a DC pension is. I am not sure what that level of understanding is at the highest levels. There is nothing like being in a DC scheme to help with understanding the issues.


Do you think public sector pensions will switch to DC?

My personal view is that the current DB structure cannot be sustained in the long term. If the private sector is going DC then the public sector will have to follow. The financial imperatives are there. If it does not happen there will be an increased divide between ‘them and us’.
That is not going to an easy transition, in fact it is going to be very painful but it has to come. It is not going to happen in the next couple of years but in the next ten something will change.


What are you thoughts on personal accounts?

The government must make sure there is no cannibalisation of existing provision – and that is very much what the Personal Accounts Delivery Authority has been tasked to do.
I think there are still issues to be worked through. There are scary statistics around the number of employers who do not realise they have to auto-enrol their existing employees into their current scheme. I am not sure the message is getting out there.
It will have an impact on all pension provision, every company will have to auto-enrol its staff. That will affect whether the company decides to offer its own scheme or rely on personal accounts. Companies have to work out how much extra this is likely to cost them.
Personal accounts are a good thing because they get people talking about pension provision. However, the cost of auto-enrolment is something that needs to be worked on. Schemes that have low take up rates are going to be severely hit in the wallet.
The default fund for personal accounts is something they need to get right. I really hope that they go for a positive option. This is potentially a huge scheme with potentially huge buying power. I think it is a great opportunity to put money into something that is managed with the members’ interests at heart that gives strong growth with less volatility.


How can communication be improved?

Given my view that the world is moving to DC, I think member communication will become increasingly important. Targeted communication is going to be a lot different for a 20-year-old than for a 40-year-old.
One thing we have looked at is an online modelling tool called Target Plan.
Scheme members can work out how much they are likely to need in retirement and project their income from current savings, pensions and investments. People who have used it say they find it very useful. That has been a big step in terms of communication.