A continuation of positive trends alongside the benefits of auto-enrolment has shaped the defined contribution pensions space over the past year, but complications surrounding the Covid-19 pandemic have brought the need to mitigate future risks to the fore.
In its 2021 DC Future Book, published on Thursday, the Pensions Policy Institute outlined some of the key trends and challenges that have emerged over the past year.
The publication, made in conjunction with Columbia Threadneedle Investments, revealed that the DC pensions market has fared positively amid the unprecedented nature of market volatility due to Covid-19.
Lauren Wilkinson, senior policy researcher at the PPI, said: “The long-term nature of pension investments, and the pragmatic approach taken by many DC schemes and savers in response to uncertainty and volatility over the past 18 months, meant that the impact of the pandemic on the DC landscape has not been as substantial as the impact experienced in other areas of the economy and society more broadly.”
It remains to be seen what the longer-term impacts of the pandemic will be on investment, employment, policy and individual saving behaviours
Lauren Wilkinson, Pensions Policy Institute
Data paints positive picture
The key takeaway from the book is that DC savers have been left “relatively unscathed” by the pandemic.
The data showed that in the 12 months to the end of June, aggregate DC assets grew to £490bn from £471bn in 2020, with 13.7m active members in DC workplace pension schemes. Of these, around 8.7m members are in master trusts.
The PPI said that auto-enrolment has continued to increase the number of people saving into a pension, but the number of workers being found ineligible is also growing.
Additionally, the research also raised questions about how the pandemic will impact future opt-out rates, as well as contribution levels across both the short and longer term.
While contribution levels have remained stable, average DC pot sizes have continued to grow, with a significant increase occurring between 2019 and 2020. T
In 2020, the median DC pot size was £11,400 — some £1,800 greater than in the previous year.
The median DC pension pot size at state pension age stands at £38,000. This is in part due to savers being cautious about tapping into their pots during the period of uncertainty and volatility last year.
Access to DC pots declined by 36 per cent to 277,500 in 2020 from 433,000 in 2019. The rates of annuities, drawdown and people making full cash lump sum withdrawals all decreased during 2020.
Conversely, partial withdrawals increased slightly over the past year, up 10,000 to 232,000.
Long-term impacts yet to be revealed
Despite the positive figures, Wilkinson said that it “remains to be seen what the longer-term impacts of the pandemic will be on investment, employment, policy and individual saving behaviours.”
“Government and employers are still in the process of developing plans for economic recovery following the pandemic,” she said.
“In terms of investment, while the stock market has now become less volatile, investment returns may still be impacted going forward, and many of the DC schemes that pragmatically chose not to make changes to investment strategy during the uncertainty of the pandemic may carry out reviews of their strategies now that the landscape is more stable.”
Likewise, individual saving behaviours, such as opt-out rates and contributions, “could also be impacted in the longer term, particularly if there are continued negative effects on employment and income”, Wilkinson added.
The long-term trend analysis suggests that by 2041 there could be 15m active DC savers. Aggregate assets in DC schemes could grow to around £995bn and median DC pension pots could grow to around £63,000.
Michaela Collet Jackson, head of distribution, Emea at Columbia Threadneedle Investments, noted that “while the Covid-19 pandemic has had a major impact on societies and economies, it did not halt positive trends we have been seeing in the UK DC market for some time, including growth in aggregate assets and median DC pot sizes”.
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However, she warned that now is “not the time for complacency”.
“A prolonged market downturn could have resulted in a far worse outcome for DC scheme members and their nest eggs,” she said.
“We encourage all pension trustees to use the experience of Covid-19 as an opportunity to work even more closely with their advisers and asset managers to assess the resilience of their schemes’ default funds.”
