The rise of Generation DC

Are Generation DC - the first generation of savers to retire without a defined benefit (DB) underpin - already coming through?

Generation DC is already a reality, says AJ Bell’s Laith Khalaf. The head of investment analysis at AJ Bell said: “I think Generation DC are already coming through, seeing as Group Personal Pensions developed at the beginning of the 1990s, and before that there were occupational DC schemes in play.

Khalaf adds: “Average DC pots at the moment are looking somewhere in the region of around £30,000 to £40,000 at retirement, but clearly there will be a wide range of dispersion within that data. That’s not a very large hill of beans and certainly not enough to see someone through a comfortable retirement. It also means more people relying on the state pension, which may well be altered by politicians struggling to fill the fiscal gap created by the ageing demographics of the UK.”

However, Alyshia Harrington-Clark, from the Pensions and Lifetime Savings Association (PLSA), said Generation DC will likely enter retirement in the late 2040s to 2050s, based on the rollout dates of automatic enrolment.

Harrington-Clark, who is head of DC, master trusts and lifetime savings at the PLSA, said: “Without policy intervention, most people in the UK will retire with inadequate pension income. According to our modelling, only half are likely to achieve the Pension Commission’s income replacement rate targets and around a fifth will not achieve the minimum level set out by our Retirement Living Standards, £12,800 for a single person. Although there have been great advances in recent years, such as the extension of the Automatic Enrolment Bill, more still needs to be done to achieve adequate, fair and affordable pensions for everyone.”

A challenging landscape

There are currently around 14 million active members in DC workplace pension schemes, compared to 981,000 active members in private sector DB schemes, according to the Pensions Policy Institute (PPI). Only 10% of remaining private sector DB schemes remain open to new members.

Lauren Wilkinson, senior policy researcher at the PPI, said: “The transition from DB to DC has increased the risks borne by individual savers, further exacerbated by the increasingly complex decisions that DC savers must now make in the post-pension flexibilities landscape.”

This year’s edition of the PPI's DC Future Book found that a median earner currently aged 22, auto-enrolled at the minimum contribution rate of eight percent, could expect to accrue DC savings which, alongside a full entitlement to the new state pension, would enable them to meet the PLSA’s moderate Retirement Living Standard for 12 years before running out of savings, or the comfortable Retirement Living Standard for just four years. 

Wilkinson said: “With current contribution rates stagnated around the minimum required rate, these future retirees will struggle to achieve retirement incomes that are both adequate and sustainable. Add to this the fact that future retirees are likely to need more money in order to achieve similar retirement outcomes to future retirees – due to longer life expectancies and changes in housing tenure – and this presents a fairly bleak outlook for future retirement if changes are not made, either in policy or individual behaviour.”

This comes as recent data from Aviva found that millions of 32 to 40-year-olds auto-enrolled into their default pension scheme are likely to be ‘triple defaulters’. These are savers who never update their contributions, investment choices, or target retirement age.

Even small changes to defaults could boost pension funds at retirement by thousands of pounds, argues Aviva.

Its research found that if typical DC savers put an extra two percent of income into their pension from age 22, this could increase their total pot on retirement by £56,000.

If the same saver worked for an extra two years, this could increase the total pot size on retirement by nearly £19,000.

And, if they could secure a one percent higher rate of return on their fund, this could deliver an additional £57,000.

Improving adequacy

Aviva is now calling on the Government and regulators to remove regulatory barriers to allow providers to deliver more effective support for those retiring in the 2050s, such as personalised guidance.

Emma Douglas, director of workplace savings & retirement at Aviva, said: “Default strategies and settings will meet the needs of a wide range of investors – with different ages, backgrounds, and income levels – and, for many, they can be the right choice. By their very nature, default investment strategies are designed to do the ‘heavy lifting’ for you, putting the investment decisions in the hands of the experts. But we also know that while defaults are essential, making small active changes to your pension, particularly increasing contribution levels, can have a significant impact.”

Her comments were echoed by Maggie Rodger, co-chair of the Association of Member Nominated Trustees, who added that this cohort of triple-defaulters would benefit from increasing their contributions.

She said: “It is a very good time to be checking if they can afford to increase contributions, especially if there is any additional employer matching. However, this is also the cohort paying much higher housing costs, so that is not an easy option. They should also be ensuring that their investment and planned retirement age are kept up to date. The default is a choice but like all choices, it needs to be reviewed at regular intervals.”