Have your say: Looking to a brighter future?

Tim Banks, Business development director, corporate solutions, Prudential

One of the key issues facing DC plans next year will be proving their value to sponsors. While this has always been the case, the recent budget changes affecting high earners (aka corporate decision makers) exacerbates the need. With a potential lower cost replacement vehicle in personal accounts on the horizon, it will be even more important for DC plans to prove their worth to sponsors. 

Governance and the cost of governance will continue to be a key theme, and in this context sponsors should be reviewing what they have in order to ensure it supports their employees’ objectives. 

In deriving value from the employer sponsored benefit, engagement with individuals is critical.

Getting people into plans, encouraging them to save enough, and understanding the decumulation phase, remain the challenge. Communication and education is key for individuals achieving positive outcomes from the benefit they receive. 

Members are undoubtedly looking for greater certainty of outcome. With the growth in the size of DC plans, new investment techniques become viable and we for one are looking to innovate in this area. 

Param Basi, Technical director, AWD Chase de Vere Consulting

1. Confidence – I think the single overriding issue is one of “consumer confidence”. Given the recent turmoil in equity markets, improved mortality and reducing gilt yields, the DC population (both employers and member) will undoubtedly be questioning the added value of pensions. 

2. Engagement – Over the years, individual scheme members have become accustomed to leaving others to make decisions in respect of their pension planning. Members of final salary schemes essentially left their employers and scheme trustees to make provision for them, while the same applied to the majority of occupational DC schemes. 

With the increase in contract based arrangements, the decision making process has been passed firmly to the individual member. However, there has been a fundamental failure to engage the member to fully understand the implications of this change. There has been a clear transfer of risk from the employer to the scheme member. Greater communication and engagement of the scheme member is therefore crucial moving forwards.

3. Government policy – The favourable tax reliefs offered to pension schemes go a long way to make pensions attractive to the vast majority of employees. However, the Government’s decision to restrict higher rate tax relief on pension savings, albeit only for the real high-earners, does cause a significant amount of uncertainty in the industry as to whether pensions will slowly lose more of their tax advantages. 

Steve Charlton, Principal, Mercer

As the pensions landscape continues to move from DB to DC trustees and sponsors are faced with restoring confidence in DC arrangements for existing members. They also need to instil confidence in DC into the minds of new members that are likely to have never made any decisions on retirement savings.

In doing so, employers need to address the question of contribution inadequacy and its impact on DC outcomes. Sponsors and trustees should be demonstrating what can be expected from current contribution levels. While it is unlikely that the required increase in contributions will come from the employer, an open communication setting out as clearly as possible how much (or how little) people will get when they retire from a DC plan might spur employees into action. This will hopefully stave off the problem of employees reaching retirement with inadequate savings as well as prevent an increase in employees requesting to work beyond normal retirement age.

With DC overtaking DB in types of provision offered by employers and member uptake a rebalancing of the effort spent on governance also needs to be a high priority. This is especially important for mixed trusts where the same trustees look after both a DB and DC scheme and DC is invariably the last, and often neglected, item on the agenda.

Jamie Clark, Business development manager, Scottish Life

2010 could be a pivotal year for DC schemes. With auto-enrolment on the horizon, employers will need to start looking at the impact this will have on pension provision and any other employee benefits they provide. They will be likely to ask questions in order to establish: 

• If existing workplace pension schemes will satisfy the minimum requirements

• What the additional payroll cost to the employer will be (for example, as a result of an influx of new members to an existing pension scheme)

• The administration costs associated with the registration, auto-enrolment and opt out processes

• How the costs associated with auto-enrolment can be controlled or mitigated - for example by managing overall payroll costs, introducing salary exchange or reviewing other employee benefits. 

The bottom line is that auto-enrolment will cost employers money and time. If employers want to get their business and workplace pension scheme in shape for 2012, now is the time to start planning for auto-enrolment. Political uncertainty shouldn’t be relied on as a blocker. The timing may change; the personal accounts scheme may not survive in its current proposed form; but next to certain that auto-enrolment will happen. 

Neil Gough, Client services director, Creative Benefit Solutions

In 2010 defined contribution pension schemes will continue to become the pension plan of choice for employers.

However, this will not be without issues. 2010 will be the year in which the impact of RDR and auto enrolment on our DC environment hopefully becomes clearer. Both have the potential to affect the level at which people save into pensions and the ability for those savers to be able to access advice.

As an industry we need to convince employers that pension schemes with contributions of 8% band earnings are not going to provide sufficient income for their employees in retirement. We also believe that in the corporate DC environment employees are unlikely to pay for advice and employers cannot always afford to, if they want to at all.

With an election due we are likely to hear much talk about tax relief on pensions being reduced, especially for the higher earners. In fact some of this has already started. We need to see all political parties thinking creatively about how to re-energise saving and not continue to put barriers in the way that reduce the effectiveness of our DC pension system.

Overall, in 2010 DC will continue as the main way of saving into a pension scheme. We need to hope that changes in the pensions environment do not reduce people’s ability to save for the retirement income they individually need.

Nick Lyster, CEO, Principal Global Investors Europe

There is growing realisation that the design and implementation of DC plans in the UK is lacking. While there are notable exceptions, too few companies and trustee boards have taken the time to understand what their employees need and how to help them meet their retirement goals. The fact that many companies are contracting out their DC plans to third parties shows they don’t necessarily view the offering of a good quality pension as a valuable benefit or a useful tool to attract and retain employees. Not only is this a missed opportunity, but potentially a dangerous legal liability in the future. 

In my opinion, governance and fiduciary oversight of DC plans needs to be improved. There is a strong case that fiduciary oversight is more important for DC than DB plans. Participants should be offered a good quality investment solution, not a range of investment choices.

Furthermore, too many default options in UK schemes still have a 100% allocation to equities. Growth assets are critical to generate satisfactory levels of retirement income, thus trustees of DC plans need to employ the same range of asset classes, investment strategies and institutional class management as those of DB plans. Diversification got a bad rap over the last 18 months, but plans that were well diversified still did a great deal better than those allocated to equities only. 

Paul Sturgess, Director of DC policy and product development, Capita Hartshead 

One of the key issues will be trying to second guess whether personal accounts and auto-enrolment will be implemented and, if so, how. Then we need to plan what to do, and when. We will be the other side of the general election soon enough, but the political and legislative machine may have other things higher up the list of priorities, so this is unlikely to be clarified any time soon.

For ‘business as usual’ we can expect to see more emphasis placed on higher levels of governance for both contract and occupational DC schemes.

2010 should perhaps be the time when schemes take a deep breath and reassess default funds and how their lifestyle funds have looked after members “in action” at times of financial unrest. 

The “retirement” phase needs to be given the attention it deserves. Many employees will be faced with the prospect of deferred or partial retirement driven by lack of adequate pension provision and retirement ages disappearing into the future. Schemes need to recognise this and start offering flexible retirement solutions for the less well off, such as interim non-annuitised “bridging” DC pensions, possibly with full annuitisation when a member completely retires. This is about using drawdown regulations as a tool to deliver flexible options for everyone, rather than just for high net worth individuals with which drawdown is usually associated.

Finally, if we can’t second guess what personal accounts will look like maybe we can second guess what their new name will be. Perhaps that’s an idea for a seasonal quiz?