DC since the credit crunch

The last two years have seen unprecedented changes in stock market values around the world. In the last 12 months in particular, we have seen equity values plunge and then start to recover, while there has also been pressure on gilt yields. Cash funds have also had their issues, with funds that invested heavily in the money markets and in asset-backed securities in particular seeing falls in their value.

All of this has meant increasing uncertainty for members of DC schemes. Aon’s DC Tracker reported in July this year that a 30-year-old worker contributing 10% of their salary of £25,000 and having a fund of £15,000 would have seen a drop in their projected retirement income of 2.3% from £21,010 to £20,659, while a 60-year-old worker with the same income and pension contribution but a larger fund of £150,000 would have seen a greater fall of 3.8% over the month from £10,782 to £10,303. However, by August, the figure for the 30-year-old had risen to £21,410, its highest point since October 2008, while the projected figure for the 60-year-old had risen to £11,384, its highest figure since September 2008.

The key message that Aon has been conveying to members is that saving for retirement should be viewed as a long-term investment. Historically, we have seen that over the long term, investing in stock markets has led to higher levels of growth than investing in other asset classes.

For members closer to retirement, they should ensure that their anticipated retirement age is still realistic, both in terms of their current objectives (which may be different from when they originally selected their retirement age) and in terms of their anticipated income in retirement. In addition, with the change in the minimum retirement age from 50 to 55, affected members will need to consider whether to start drawing benefits before April 6, 2010 or to defer taking benefits until they reach age 55 at the earliest.

In the light of these issues, it is important that employers make members aware of what is happening and the main factors to consider. One of the best times to do this is as, or shortly before, members receive their annual pension statements. In addition to explaining how to read the statements, such a communication can help members make informed decisions and not be panicked into rash ones that may cost them dearly in the medium to longer term, such as switching from equities into cash when they are at a low value and crystallising any losses.

Evidence shows some of these messages are getting through. Aon’s Pensions Admin Tracker noted last month that the number of scheme members requesting their projected pension based on their current savings plan has fallen by 9% since the last quarter (although this is still 36% higher than the corresponding quarter in 2008). 

Similarly, as equity markets claw back previous losses and talk of economic recovery increases, pension savers are displaying improved levels of confidence; we saw a fall of 17% in the number of requests for information regarding the current pound-value of their pension pot over the same period. In addition, only 0.01% made changes to where their DC savings are invested, the same as the previous quarter.

The last two years have seen several new developments that help members make such decisions and enable employers to communicate more effectively with scheme members, with these changes being driven by technological advances.

Many schemes now offer member websites, enabling members to log on and – for example – view current fund values, switch funds and obtain the latest fund information and performance figures. Just as important, many scheme websites now incorporate ‘what if’ calculators. A ‘what if’ calculator allows members to run a projection of their benefits to their selected retirement age, enabling them to assess what income they are likely to receive in today’s terms and whether it is sufficient. 

Most modellers will also allow members to vary contribution rates and add one-off contributions to see what effect these changes may have, as well as calculating required contribution rates to achieve a desired level of retirement income. The more sophisticated modellers also allow members to input details of previous pension arrangements so that they can obtain a complete picture of their estimated total income in retirement, which can include any state pension forecasts obtained.

In summary, member awareness, including an understanding of their individual situation and the main factors to consider, is vital at all times but particularly in periods of economic volatility. Communicating such messages in a timely and relevant fashion is always a challenge, but new tools that can now be made available to members make this process easier.