DC schemes: Is it time for a reboot?

The committee’s 29th report of this session called into question several issues regarding the way in which defined contribution schemes are managed. 

It shone a light on the pensions and asset management industry, which has been criticised for failing to provide clear and transparent information about the costs and charges of investments. 

The paper follows a joint strategy published by the Financial Conduct Authority and the Pensions Regulator in October last year, which aimed to address what it considered “the overarching harm” in the sector – the prospect of people not having adequate income or the income they expected in retirement.

Schemes of all sizes should be reviewing their objectives at least every three years, including an honest appraisal of the retirement incomes the scheme is expected to generate

The frustrations expressed by the committee and regulators are valid. Issues such as whether fund managers will provide the required cost data information unless doing so is mandatory, are a major concern for several trustees. 

Some trustee boards are being forced to issue non-compliant chair’s statements because their fund managers have not provided the figures, nor a credible explanation for not doing so.

The lack of availability of this information should not reflect badly on trustees nor distract them from their key objectives, but the threat of receiving a fine and being “named and shamed” by the regulator is a burden on trustees’ shoulders.

Herein lies the danger of focusing solely on transparency. While the FCA and TPR are right in suggesting that inadequate income in retirement is a key risk for members in DC schemes, improving the process of governance alone will not transform the fundamental retirement outcomes for members.

Sponsors’ and trustees’ clear strategic objective should be to provide adequate retirement benefits and design the scheme contributions, investment strategy and retirement to achieve this. 

An overly heavy-handed approach could have unintended consequences and result in some trustees diverting too much energy into making sure they pass the chair’s statement “test”, rather than focusing on their strategic goal – improving retirement outcomes for their members. 

Mandatory reviews for all

To ensure that stakeholders do start to focus on the true purpose and value of their scheme, regulators could broaden the scope of their demands.

One of the ways in which the committee report suggests improving outcomes is by promoting the economies of scale that larger schemes can access, and addressing the underperformance of some smaller schemes against their key governance requirements through a mandatory review every three years. 

But why stop at smaller schemes? Schemes of all sizes should be reviewing their objectives at least every three years, including an honest appraisal of the retirement incomes the scheme is expected to generate. 

Our recent research revealed that while 78 per cent of employers believe DC pensions are an important element of their benefits programmes, only 44 per cent were concerned about the impact on their business if employees cannot afford to retire.

Additionally, Office for National Statistics figures indicate that less than 10 per cent of DC schemes have sufficient contributions to provide adequate retirement benefits, using a benchmark of 12 per cent of salary – which is still less than half the total contributions made to defined benefit schemes.

Fresh thinking called for

Auto-enrolment has been a positive policy in getting more people to save for retirement. There is, however, a great risk that members have switched off from their savings as a result, thinking their monthly default contributions will be enough to sustain them in retirement, when in fact this is not the case for most members. 

Government initiatives such as the mid-life MOT and the expanded scope of the new Money and Pensions Service, are a step in the right direction. But there is still a lot of ignorance of issues taht are affecting DC savers right now.

In comparison with the press frenzy over the tapered annual allowance on pension savings for high-income earners, the money purchase annual allowance, which overrides the TAA, has received very little airtime.

However, the MPAA can dramatically reduce pension saving levels, it comes with daily fines for members, and has already affected more than 1m individuals in the UK. 

Running a DC pension scheme is not easy. It comes with a lot of risks and is even more complicated in the current legislative and regulatory environment. It is clear we need greater regulatory alignment and improved DC scheme management.

Greater honesty about the expected retirement outcomes from DC schemes, coupled with an industry-wide, long-term strategy to improve these outcomes, will ensure members do not get further disadvantaged by unintended consequences. Maybe it is time for another Pensions Commission?

Mark Pemberthy is head of DC and wealth at Buck