The Future: from thought leaders: Design dc pensions to succeed

This article is brought to you by AXA

Alan%20MilwardSteps can be taken to make DC pension schemes more effective, says Alan Millward, head of workplace distribution for corporate benefits at AXA

Are defined contribution (DC) pensions destined to fail? If we examine the needs of members and sponsors of DC pensions it becomes quite clear what the answer to that question is.

In the most basic sense, members require adequate savings to allow retirement at a reasonable age, the knowledge that their money is safe and reassurance that they have made sound decisions.

Scheme sponsors will first be looking for value through a return on the investment they have made to provide for their employees after work. Second, they will want the ability to enable retirement without falling foul of age discrimination legislation, and finally, they will require administrative ease and the provision of clear and accessible information for scheme members.

Are current DC schemes delivering all of the above? It is easy to say no because a number of problems are clear to see. For example, only 40% of people are saving any money despite 80% acknowledging that they will need more than the basic state pension in retirement, according to the Department for Work and Pensions’ White Paper Personal Accounts: A new Way to Save, published in 2006.

Futhermore, many of those currently saving may not be saving enough or are doing so into inappropriate funds. There are obvious barriers to saving as people have many other demands on their income and any drop in take-home pay is seen as a loss. In addition, employee engagement levels with pensions are generally low, meaning staff do not fully value the benefit provided.

But as an industry there are steps we can take to address all these issues and ensure that DC pension schemes deliver what is required going forward. Such an approach could include auto-enrolment, an automatic increase in member contributions at agreed dates in the future, end-dated default funds and redefined objectives when it comes to communication and education.

Auto-enrolment is now commonplace and requires members to opt out rather than opt in. This has driven up participation rates but often members stick to their default contributions which may be too low to provide an adequate retirement fund.

Increasing member contributions at pre-programmed rates timed to coincide with annual pay reviews is a relatively new concept for the UK. This ‘save more tomorrow’ approach has the dual benefit of increasing members’ contributions to an appropriate level without them experiencing an undesired drop in take-home pay.

Inertia and lack of understanding often prevent members from regularly reviewing their fund choices which is why we recommend end-dated lifestyle funds as a default. The benefits of these funds are clear. No decision is required by members at the outset or in the future as the funds are invested in an appropriate asset mix at every point along the retirement journey.

Finally, education and communication objectives need to be redefined. The steps detailed above will enable members to build up suitable levels of savings for retirement, however, ongoing communication and education should focus on building levels of understanding and providing reassurance.

A trained and qualified team is needed to work with the sponsoring employer to ensure the education programme fits its particular scheme. Through personalised, simple and continuous education, member engagement and understanding can be improved. This will lead to greater value being placed on the benefits provided.

The tools required to achieve these improvements already exist, the key is for them to be factored into scheme design. By thinking differently we can ensure that DC pensions are designed to succeed.

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