LGIM's Emma Douglas says clear member communication and helpful product design must be central to the industry's efforts to help the DC generation tackle the savings challenge ahead of them.
These problems are even more acute for millennials. A recent study by the International Longevity Centre-UK concluded that young workers in the UK will need to save 18 per cent of their earnings each year in order to secure an adequate requirement income, defined as two-thirds of the average pre-retirement salary.
Only around 12 per cent of people in the UK are currently saving more than 15 per cent of their earnings for retirement – and this figure includes older demographics and higher earners.
Asset managers need to remain focused on the things they can control: empowering schemes and savers to navigate a changing world
New regulation has made some improvements to saving levels; auto-enrolment has seen eight million people enrolled into workplace schemes, but it is still early days.
While the combined minimum paid into a pension by employer and employee is set to rise from 2 per cent of a band of earnings to 5 per cent in 2018 and 8 per cent by 2019, this will not in itself be sufficient to bridge the gap required for many to achieve adequate retirement income.
Unfortunately, many individuals still do not understand the severity of these numbers.
Searching for solutions
The most important thing for investors is to start saving as much as possible as early as possible. But while incomes are squeezed and prices rise, this is easier said than done.
Asset managers, on the other hand, need to remain focused on the things they can control: empowering schemes and savers to navigate a changing world and to meet these challenges head-on.
Since the announcement of the freedom and choice reforms in 2014, asset managers have evolved their product propositions to appeal to savers having to make this kind of decision for the first time.
Target-date funds, for example, have been developed to cater for a range of future retirement dates, aligning asset allocation with a member’s chosen retirement goals, and creating flexibility for individuals who do not want off-the-shelf solutions.
Retirement income-focused products have likewise been developed to fill the gap once occupied almost solely by annuities.
Communication is vital
The range of funds and products available to defined contribution investors has arguably never been greater. Neither has the need to educate members on how to make the best possible choices.
Technology has the ability to change the way savers interact with their retirement pots.
Mobile apps now provide immediate access to portfolios, and more sophisticated online tools can model things like future retirement income so that users have a clearer picture of what to expect at retirement.
These will become increasingly important as means of improving member engagement, as today’s digital natives become tomorrow’s retirement savers.
Time to outsource?
It is not just savers who need to make complex choices in an uncertain environment. Scheme trustees and administrators are also navigating a confusing set of options in order to meet their obligations to their members.
Depending on the scheme, this might mean having an asset manager take care of any combination of administration, governance, member communication and fund provision. All-in solutions such as mastertrusts are making it increasingly straightforward for employers to provide professionally managed and administered pensions for their employees.
Communicating effectively with members will be a crucial lever for schemes in helping individuals bridge that gap between what they are currently saving and what they need to save in order to secure the retirement they want.
The outlook for savers remains challenging. In this environment, it is increasingly important to empower individuals to save and invest, improve long-term investment outcomes and make it easier for employers to provide sophisticated pensions solutions for their workers.
Emma Douglas is head of DC at Legal & General Investment Management
