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
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