It’s widely recognised that defined contribution (DC) plans haven’t yet delivered the outcomes that pension savers and wider society need. Birthed from the decline in defined benefit provision, the fundamental design of the DC plan is pretty sound – it’s hard to criticise the basic principle of a tax-efficient place to hold your long term savings, until such time as you cease work – but the wider detail and context of the DC savings plan hasn’t yet evolved sufficiently.
Over recent years, we have witnessed positive progress on a number of fronts. Most notably, auto-enrolment legislation has massively increased participation rates amongst the employed, and significant steps forward have been made on the decumulation front both before and especially after the advent of Pension Freedoms. Real challenges remain, however, and some of the main areas crying out for revolution and innovation are wider coverage (the self-employed being grossly under-provided for); adequacy of savings rates for all; a persistent lack of trust in the financial services sector; and true understanding and engagement from pension savers. Fundamentally, the eternal problem of the pension product is that people would much rather spend their money now than later – most people find it very difficult to relate to their future selves.
The days of simply ‘being a member’ of a DC pension scheme are definitely numbered. If you don’t understand and actively engage with your savings pot, it really doesn’t matter how tax-efficient it is! Employers, product providers and financial advisers and benefit consultants all have key roles to play in the transformative evolution of the DC space.
One of the things that is apparent is that for many of the challenges, a one-size-fits-all approach will not work. Both products and engagement strategies are moving very much away from ‘off-the-shelf’ and turning at a pace towards targeted, pragmatic and bespoke. Whilst true bespoking of products and engagement methods can be expensive and often impractical, the best employers, trustees, product providers and advisers are thinking actively about how to affordably tailor communications and solutions themselves to be much more relevant to individual members. This significantly helps savers with truly engaging with their plans – the more relevant the information provided is to them personally, the more they are likely to act and relate to it.
The industry and society itself also has a journey to go on in evolving the nature of the conversation past ‘good’ and ‘bad’ products or choices (think the worst of the ‘annuities are awful’ press articles around the time of the Pension Freedoms). The future of DC pension saving and ultimately spending will lie in a variety of solutions, sometimes blended, to create the right balance for each individual. It’s really important not to lose focus of the fact that whilst some DC savers value flexibility and choice, for a significant number of others what they prize most highly of all is simple financial security, consistency, and the reassurance that they don’t actually need to make many ongoing financial choices (and at the points when they do they want help and support to make them).
Ultimately, the successful evolution of DC will come back to basics – proactive employers and trustees working with advisers to carry out true quality ongoing governance for their schemes is absolutely fundamental. From the specific insights gained, products and schemes can be evolved in the right way. The legislative background will have a big role to play, but ultimately employers will be a key determinant of the success of DC. They will need to strike a careful balance between paternalism, commerciality, and the provision of genuine choice to members.