Demographic shifts in the population and changes in the defined contribution (DC) pensions landscape will place additional challenges on future retirees when attempting to provide for themselves in later life, research from the Pensions Policy Institute (PPI) shows.
The tenth edition of the research body's DC Future Book – published today (26 September) in association with Columbia Threadneedle Investments (CTI) – found with an average increase in life expectancy and with future retirees more likely to reach retirement and be dependent on their DC savings with little to no defined benefit (DB) savings to draw upon, this will provide them with "greater flexibility" when deciding how to use their DC savings in later life.
However, the report noted this would mean future retirees will face increased complexity at, and during, retirement and will be increasingly more likely to have a need for long-term care in later life and may face "challenging decisions" as to how they would fund this.
The PPI also stated last year, the Conservative government launched a number of consultations on several proposals designed to improve the outcomes for DC members including a value for money (VfM) framework, the consolidation of small pots, proposals around decumulation as well as the Mansion House compact, in which an initial number of DC providers pledged to allocate 5% of assets in their default funds to unlisted equities by 2030
The report also noted since the new government has taken office, it has launched the first phase of a pensions review and confirmed a Pension Schemes Bill which it noted aims to build on the reforms put forward by the previous government around the proliferation of small pots, the VfM framework and compelling schemes to provide their members retirement products once they reach retirement.
The report's analysis of the current DC landscape showed under auto-enrolment (AE), 11.1 million people were enrolled into a workplace pension scheme as of June 2024. However, it also revealed the number of employees who were ineligible to be enrolled under AE exceeded the number of savers currently enrolled, at 11.2 million.
The institute said this means further reforms may be needed to bring more people into workplace pension saving, despite the bill to extend AE being granted Royal Assent last year. The PPI's research found if the measures in the AE extension bill were implemented, this would increase the eligibility by around 3% and encourage younger employees that saving for later life is important.
The report also noted contribution rates among members of DC schemes remained around the minimum levels, which the PPI said is unlikely to deliver "adequate" later-life outcomes for members. However, it also found while average DC pot sizes declined in the early years following the introduction of AE, the average pot size reached £12,700 in 2023.
PPI policy researcher Shantel Okello said: "The past decade has seen remarkable shifts in the DC pensions landscape, with increased individual responsibility and exposure to risk. As we look forward, it is becoming increasingly important to develop policies and strategies that support members in navigating these changes and securing positive retirement outcomes. Technological advancements and innovative investment approaches will play a key role in shaping the future pensions landscape.
"The transfer of responsibility and risk from employers to individual members has accelerated, driven by the closure of private sector DB schemes and the corresponding rise in DC schemes, propelled by the introduction of AE. DC members now bear greater responsibility for their retirement security and are put in a position where they need to make decisions about accessing pension savings which will significantly affect their retirements.
"As a result, efforts to mitigate risks associated with DC saving and access are intensifying. Policy changes such as the VfM Framework, pensions dashboards, and small pot consolidator models aim to address inefficiencies within DC pensions but each of these initiatives places an onus on industry to adapt and develop, which must be supported by government, while ensuring costs for members don't rise unduly."
CTI institutional business director Andrew Brown added: "The past decade has seen evolution replaced with revolution in the provision of DC pensions. AE has dramatically increased the number of people saving towards retirement, partly enabled by the rise of master trusts.
"Investment strategies have also changed, with the integration of ESG risk factors and more recently a focus on private markets. Freedom and choice has led to changes in glidepaths to facilitate the range of options now available to those accessing their DC pension savings.
"Challenges remain, however, with DC pension pots still considered a poor substitute for DB, given small pot sizes and current projections. While AE has dramatically increased the number of people saving towards retirement, the research highlights the number of ineligible employees has also risen at a similarly robust rate. The risk of poor decision making in decumulation also remains a conundrum."
