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In recent years, regulators have put so much emphasis on the minutiae of defined contribution pensions that we seem to have forgotten about the bigger picture.
It seems absurd to focus on the detail when the infrastructure that supports DC is fundamentally outdated and no longer appropriate for the post freedom and choice world.
I am all for improving the quality of DC pensions – a more robust and insightful governance framework is needed. However, current thinking ignores the big ticket fundamentals that have most impact on member outcomes.
Increase length of time members are in a pension
The longer a member contributes to DC, the more time they have to accrue contributions and for investments to work harder for them.
One trick the government has missed is to readdress the starting age for auto-enrolment. Bringing it forward to 18 is an improvement, but introducing AE whenever someone starts their working life will encourage people into the savings habit and culture.
We also need to make retirement ages more realistic. People aren’t going to retire at 65 and DC administration platforms and infrastructure need to adapt in line with the state pension age.
To get more out, you have to put more in
"The level of contributions is the single biggest factor in determining outcomes."
Although this year and next will see minimum contributions rise, it seems utterly remiss of the government not to have taken the opportunity to build on that foundation, and get DC adequacy to where it needs to be.
The level of contributions is the single biggest factor in determining outcomes.
Planning for the future could have been the start of a “save more tomorrow” concept where members are forced to increase payments over time.
Value is lost when pot size is largest
The point at which members convert their savings pot into a retirement income involves massive leakage of value, and this decision currently sits outside of the occupational pensions governance framework.
Moving pots from a well-governed, good value pension to a higher-charging individual retail policy with little to no governance does not make much sense.
Don't be distracted by CDC
Unfortunately, the answer that part of the industry seems to have come up with is that DC is not the right vehicle to solve the issue and we need to revisit some form of risk-sharing agreement, such as collective DC or defined ambition.
DC is an efficient vehicle and the average member understands the concept if we talk about it as a glorified savings account.
More worthy causes within DC might include better use of technology for engagement, ending the absurdity of daily pricing for members below 50, and encouraging insurers to innovate on longevity risk.
If we fixed these issues, most importantly by attaining the same contribution levels that defined benefit had and that will be needed in CDC, there would be much stronger outcomes.
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