The success of defined contribution is hanging on the ability to drive up contributions while keeping members on side with pension savings, as data show it risks falling short of delivering adequate retirement incomes.
A Pensions Policy Institute report released this week said more needs to be done to encourage saving and pension engagement.
The stark findings from its research, titled ‘The future book: unravelling DC pensions’, predicts DC assets will be worth between £364bn and £914bn by 2030 – a far cry from the £1.7tn predicted by the Pensions Institute in January last year.
The government doesn’t want to make employers bear too much cost… and if they make [contributions] too high people could start to drop out
Daniela Silcock, Pensions Policy Institute
Chris Wagstaff, head of pensions and investment education at asset manager Columbia Threadneedle Investments, which commissioned the report, said that by 2030 the "vast majority" of people will be relying on DC pension pots.
But Wagstaff added people need to be encouraged to save more and choose the right investment strategy for their goals.
He said: “The way you reach out to someone in their forties or fifties is totally different to how you’d reach out to someone in their twenties or thirties. What I’ve seen from working with pension schemes is I don’t think they understand that difference.”
How to incentivise people to save is a challenge for policymakers. The government last week concluded its consultation on pension tax relief, an incentive the PPI had previously said was “poorly understood and there is little evidence that it encourages pension saving among low and medium earners”.
Wagstaff said: “We just need to make pensions more appealing. We need to get people thinking about what would it be like in 30 or 40 years' time if you didn’t have the standard of living you have today.”
DC pots growing... but not enough
The PPI study, which makes projections based on data from the Office for National Statistics’ Wealth and Assets Survey, showed the median pension pot size at state pension age could reach £56,000 for those currently aged 35-44, up from £14,100 for those aged 55-64.
However, Daniela Silcock, head of policy research at the PPI, said this amount would only be adequate if it supplemented other income and savings. She said: "You need quite a lot more to support a retirement of 30 years.”
But she added the need to increase contributions brings its own challenges, as little is known about the effect raising pension contribution levels will have on opt-out rates.
Silcock said: “Part of the reason contributions are relatively low is… the government doesn’t want to make employers bear too much cost… and if they make them too high people could start to drop out.”
The report found 5.4m employees had been auto-enrolled by August 31 2015, but 5.2m had been deemed ineligible.
Silcock said lowering the earnings threshold could address the high level of ineligible employees, as well as going some way to counteracting the higher likelihood of disadvantaged groups such as ethnic minorities and women being ineligible for auto-enrolment.
Speaking at an event to launch the study, Michelle Cracknell, chief executive of the Pensions Advisory Service, said understanding of pensions among savers needs to improve to empower them to make their own decisions.
She said: “People know they need to do something for their retirement, I think it’s pretty obvious… they just don’t know how to do it.
“Our belief is that there should be a public sector provision that is independent and impartial, and helps people to get the help they need to get them on the journey to getting engaged.”
