Industry Voice: Fixing DC — a five-pronged approach

Chris Wagstaff provides a flavour of what needs to change if defined contribution (DC) outcomes in the UK are to improve materially and sustainably and good outcomes are to become the norm.

Chris Wagstaff
clock • 4 min read
Industry Voice: Fixing DC — a five-pronged approach

Spoiler alert: it isn't just the one silver bullet that'll fix DC.

  • The UK has moved from a system of generous pension provision, collective passivity and certain outcomes, to one that is decidedly less generous, which entails much greater individual engagement and decision making and results in much less certain outcomes. Given this, a whole generation are potentially facing a worsening retirement outlook.
  • The move from defined benefit (DB) to, the enforced default of, defined contribution (DC) started during the noughties following the dotcom bust, the introduction of mark-to market accounting for DB schemes and the global financial crisis.
  • While automatic enrolment (AE) has dramatically increased workplace pension participation and seen active DC membership overtake DB, DC assets only represent 19% of total UK pension fund assets.
  • As legacy DB benefits increasingly disappear, in the absence of a dramatic increase in DC contribution rates and stellar long-term investment performance, the state pension will increasingly become the mainstay ofmost  retirement outcomes. This is evident from UK net (after tax) pension replacement rates trailing OECD averages and median DC pension pots at State Pension age forecast to grow from £38,000 today to only £63,000 in 2041 (in 2021 money terms). Despite this, savers' expectations of the standard of living in retirement their pensions pot will support continue to be severely misaligned with the reality.
  • Five measures are required for retirement outcomes to improve both materially and sustainably: 1. Improving AE coverage and raising minimum AE contribution rates; 2. Encouraging greater DC saver engagement; 3. Making more widespread the provision and signposting of simple and easily accessible tools, guidance and low-cost advice to aid informed decision making and enable more decisive action; 4. Optimising DC savers' investment returns, and 5. Focusing on Value For Money.
  • Ultimately, whether a minimum, moderate or comfortable retirement becomes the norm, is largely contingent on timely and decisive action or continued inaction by both the pensions industry and by policymakers.

 

 

This post is funded by Columbia Threadneedle Investments

Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority. In UK Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. columbiathreadneedle.com

Chris Wagstaff
Author spotlight

Chris Wagstaff

Head of Pensions Investment & Education @ Columbia Threadneedle Investments

More on United Kingdom

Solar subsidy cuts to hit liability matching strategies

UK - Government plans to cut a subsidy boosting the appeal of solar panel infrastructure investments could scupper scheme plans to use these investments as part of their liability matching strategies, fund managers say.

clock 09 November 2011 •

Aegon moves to halt DB scheme future accrual

UK - Aegon is to close its defined benefit pension scheme to future accrual in March 2013 as part of its restructure and cost saving programme.

Jenna Towler
clock 08 November 2011 •

PPF reveals £678m surplus

UK - The Pension Protection Fund has published its annual report - revealing a surplus of £678m ($1.1bn) at 31 March.

Jonathan Stapleton
clock 07 November 2011 •
Trustpilot