Cranking up the gears on DC contributions

For Top Gear fans out there it is time to confront the inevitable truth: the programme will flounder without Clarkson’s banter and gung-ho attitude fuelling the engine.

Because a good model without the right content will not get you very far. 

In the pensions industry, discussion of defined contribution provision in recent months has focused on default design, access to flexibilities and the all-too-familiar soundbite “good member outcomes”.

However, beyond investment strategies and member outcomes, contribution levels will play a crucial role in determining the long-term success of DC and the delivery of adequate retirement income to UK savers. 

Governance frameworks enabling DC trustees and providers to negotiate member benefits with employers are limited. Unlike in the defined benefit world, DC trustees have no statutory responsibility to oversee contribution structures.  

A forward-thinking employer will understand the point of increasing contributions,” he said. “There’s no real magic to it – the reality is, it’s the contributions that make the difference

Jonathan Reynolds, Capital Cranfield

Ian Pittaway, senior partner at law firm Sackers and chairman of the Association of Professional Pension Trustees, said there is currently a very active debate between trustee boards on this issue, with many gravitating towards either a “minimalist” or a “lobbyist” position.

“You have those two schools of thought,” he said. “I don’t think there is a right or a wrong answer. Should we be minimalist and just accept what the position is or should we be lobbyists and try and get more money in for the pension scheme members?”

Jonathan Reynolds, client director at professional trustee company Capital Cranfield, said DC trustees do not have the leverage to force the issue with employers. 

“It’s a difficult area,” he said. “[DC] trustees’ ability to push employers further on this is very limited.

“It’s easy to get into the technicalities of investment and the interesting, intellectually stimulating stuff… but if you haven’t got the funds in there it’s all pie in the sky."

Reynolds said trustees can present both moral and practical arguments to employers and that the 'save more tomorrow' concept can be a powerful tool.  

“A forward-thinking employer will understand the point of increasing contributions,” he said. “There’s no real magic to it – the reality is, it’s the contributions that make the difference.”

Effective communication

Adrian Kennett, director at independent trustee company Dalriada Trustees, said both trustees and independent governance committees in contract-based schemes are powerless to bring about widespread increases.

“Until the government legislates for higher contributions as a base level for all, then the outcomes that people get from DC arrangements will in no way mirror those that went to [previous] generations,” said Kennett.

However, he said trustees could increase awareness of the long-term power of increased contributions by improving communication with both employers and members.

“There is some education that trustees can bring to the piece, to make everyone aware of exactly what the current contributions are going to buy,” said Kennett.

He added: “I’m not sure the statutory statement [to members] actually hammers home the information that well. With a multi-pronged strategy of email and websites to back up that paper communication, there may be better take-up of information.”  

Clive Gilchrist, deputy chairman at Bestrustees, said trustees must ensure members fully understand the need to save sufficiently for retirement.

He added: “The danger with schemes set up just at auto-enrolment levels is that people think they’re saving for retirement, 'I’m doing what the government says', oblivious to the fact that’s nothing like enough.”