The DC Debate – does the future offer greater freedom, or further restrictions?

To what extent has freedom and choice boosted engagement in pension saving? Has this gone as far as it can go?

Mark Futcher: Those aged over 50 have been keen to understand the new flexibilities and we have seen an increase in contribution rates – especially where a tiered contribution structure from their employer means they can use this as a short-term savings vehicle – to essentially draw out as cash in a few years when they are 55-plus. There are lots of misunderstandings over the new freedoms.

Barry Parr: Freedom and choice has hardly had an impression as yet on overall engagement. It will be a while before the full scope and familiar usage of freedoms is appreciated and before it becomes part of common lore understanding.

On a scale of engagement topped by, say, X-Factor and The Great British Bake Off, pensions are a long way back

Richard Butcher, PTL

Emma Douglas: We saw increased numbers contacting our call centres and Pension Wise has also seen a pick-up. Admittedly we’re starting from a low base, but these are good signs. We need to build on this by engaging with members in ways that suit them. This will inevitably involve digital solutions, but it will need to be more important than just launching an app.

Richard Butcher: The perception that the cash is more readily available seems to have boosted the popularity of pension saving for non-members and existing members – the second group upping their contributions. Has it gone as far as it can go? Not by a long chalk.

On a scale of engagement topped by, say, X-Factor and The Great British Bake Off, pensions are a long way back. This may change in time as a) pension saving levels increase, b) pension funding levels increase, c) fewer of the population have defined benefit pensions to fall back on, and d) if the industry realises it is rubbish at communication and changes its approach.

Alan Morahan: The new flexibilities have undoubtedly taken away one of the barriers people cited for not investing in pensions. This in itself might have increased engagement were it not for the further tinkering in pension legislation and the consultation on tax relief.

Those already engaged have remained so and many are maximising contributions while they can still do so, but many others remain largely disengaged as a result of the uncertainty.

Andy Dickson: We have seen in the press some examples of customers unable to access their savings easily, but there is also great service and guidance available, given more than £1bn was paid out in the first three months. 

With recent market volatility it is becoming increasingly clear to defined contribution savers how important an appropriate investment strategy is and the difference this can make to the value of their savings. So I believe investment choice will be the next big thing in pension savings engagement.

Alistair Byrne: Retirement savings are now more widely discussed, and there has been a positive response to greater flexibility. More significantly, auto-enrolment continues to raise participation rates, with opt-outs typically less than 10 per cent.

Both initiatives should be left to work their course and are to be applauded as positive steps towards improved consumer engagement. The government has suggested moving from the current system of pensions tax relief to an Isa-style system. This may boost engagement and provide savings incentives, but evidence for this seems thin so far.

Steve Charlton: For some, increased choice has been welcome. For others, the complication of choice will reduce engagement because of the baffling range of options. While choice has probably gone as far as it can within the current regime, perhaps thought should turn to the choice architecture that will help the disengaged make better decisions.

Does the recent missive from the Pensions Regulator urging trustees to act now on DC standards point to potential issues with charge cap compliance?

Parr: The regulator is aware of inadequate standards in part of the DC market and they are doing their best to help sort the wheat from the chaff before they need to take regulatory action. Of course the charge cap is part of that overall picture, but it is also the most visible element of the new regime and in some ways the item most easily fixed by those that may not meet the new limits.

Futcher: The latest legislation and best practice guidance needs considerable thought and input. All trustees will have to take action with regard to some aspect of their scheme and how each element contributes to, or does not detract from, value for money and value to member.

With the chair’s statement needing writing, and with definitive timetables, trustees need to ensure they have all the information to hand so analysis can begin.

Some smaller schemes mayhave less awareness andwill benefit from clearguidance about what theywill need to do

Alistair Byrne, State Street Global Advisors

Douglas: We don’t think so. Most modern DC schemes already comply with the charge cap, and are putting more thought into quality of governance and administration. Regulator pressure and support can help keep the momentum going.

The charge cap is probably a greater issue for older legacy schemes, but we’re seeing more providers bringing low-cost solutions to market, which should help address the issue.

Butcher: I don’t think so – it points to a potential issue with DC standards compliance. Most DC members are in bundled schemes and the providers of these are well aware of the charge cap. Invariably they have taken unilateral action to comply.

That, however, is only one aspect of DC standards and many trustees continue to be lax in others, including good value assessment and default investment strategy design. For DC to really work it needs to be as efficient as possible. The DC standards are designed to increase efficiency. This is why they were introduced and why the regulator is keen for trustees to comply.

Morahan: I suspect the regulator expects a number of trustees to use the adjustment measure and therefore wanted to remind them of the conditions applying to its use. Before October 6, trustees can use the adjustment measure where, despite best efforts, they determine they are unlikely to be able to comply with the charge cap in the current or following charges year, provided you meet all the necessary conditions.

If a scheme does not comply it may be subject to enforcement action, including fines, and the regulator probably wanted to give fair warning.

Dickson: Given the October 6 deadline for trustees to comply with new requirements is fast approaching, you can understand why the regulator has issued this at this time. The new requirements include having improved governance standards in place, appointing a chair, the production of an annual statement from the chair, as well as complying with the charge cap.

Byrne: The regulator is simply reinforcing that the new standards are now in place. Some smaller schemes may have less awareness and will benefit from clear guidance from the regulator about what they and their advisers will need to do.

Charlton: I don’t think there is much to read into the the regulator’s communication: it’s good for anyone to receive a reminder of upcoming duties. Using it as a method of providing additional tools, can’t be a bad thing. Don’t forget, it is the regulator that has been reminding employers of their upcoming auto-enrolment duties, and that seems to have worked well.

Which is the greater risk to pension saving: the broader investment environment or continued political tinkering?

Parr: The great fall of China is taking place and so we are reminded that crashes do happen – and fairly frequently in pension terms. We live in a world where political tinkering is an inevitability – where balancing wealth and taxation across society is a mission of governance and where the gaming of investment seeks to anticipate it.

Futcher: We know that the investment environment is not certain, but we can mitigate the effects of volatility over the longer term. Trustees, employers and the UK public cannot make long-term decisions when there is continued political tinkering with pension legislation that impacts not just high earners, but everyone.

The high earners are disheartened and will look towards the here-and-now needs of their workforce and have a compliance-only regime with pensions.

In the nine years since A-day there has rarely been a Budget that has not brought significant change to some element of pension legislation

Alan Morahan, Punter Southall

Douglas: We’d see political risk as the greater threat. Many struggle to understand pensions anyway, and if they see constant change it can’t be good. Uncertainty is what kills willingness to save. Yes market volatility also causes concern, but people can see that markets recover – with a bit of education, they can also learn that pound-cost averaging makes sell-offs a friend. We want politicians to be vocal, but in helping to get people interested in their pensions.

Butcher: No contest: political tinkering – although I’m not certain that the wholesale restructuring of tax relief is mere tinkering. Members have to have a stable legislative framework if they are to commit money to the pension system. Why pay money in only to find, some way down the line, you’re going to be penalised for doing so?

We urgently need a cross-party settlement and then stability. This is why an independent pension commission is a good idea: taking the politics out of pensions will improve trust.

Morahan: It is unquestionably political tinkering. In the nine years since A-day there has rarely been a Budget that has not brought significant change to some element of pension legislation. The lifetime allowance has changed seven times since its introduction, and has spawned five forms of protection, with more to come.

This constant tinkering has served to undermine the credibility of pension saving and has added complexity, which has an impact on costs.

Dickson: Both. The market backdrop presents a number of risks to DC savers. On August 24, global equities suffered their worst day of trading since 2011. It has never been more important to have investment strategies that can navigate a variety of market conditions.

Political tinkering feels more like consistent game-changers, as we go through another key policy review of tax treatment of pension savings. Consumers I am sure would prefer a period of stability.

Byrne: Against a background of positive policy action (auto-enrolment, single-tier state pension, improved governance standards), continued political tinkering runs the risk of unintended consequences. Further wholesale changes in the pension tax system may create cost and complexity without a substantial return. Risk in the investment markets is a perennial feature of long-term saving and can be mitigated by thoughtful strategies.

Charlton: The greater risk to pension savings is the move to restrict further the lifetime allowance, the annual allowance and tax relief for higher incomes. The LTA will start to affect members of good DC schemes that started saving young and anyone that has accumulated a modest level of DB benefit. Yet we should be encouraging savers. This will ultimately benefit the taxpayer.

What will feature in the next chapter of achieving value for money in DC pension provision?

Parr: First DC must survive the foraging of the chancellor and his engorging of the taxation honey-pot. Then it must respond to the end of the funding black hole that is the short-service refund holding account – how will sponsors react when the DC scheme no longer has this source of income?

Will sponsors pay more, will members pay more, will the scheme be outsourced? We might once again also wish to talk about collective DC for improved value.

Futcher: The conversion of the pension pot into a secure income was the single biggest detractor of value to pensions – whether this was real or perceived it made little difference. Choosing the wrong option could easily waste up to 10 years of contributions.

It is therefore interesting that retirement is largely outside of regulations around value for money, whether we are looking at trust or contract-based investment governance committees. We need to see innovation in the retirement space.

Douglas: The charge cap is a balancing act. We’re seeing trustees pulling away from focusing purely on cost and looking at the entire member journey – so the areas where we think there is more to come are engagement, as well as solutions to meet demand for pre and post-retirement flexibility.

DC must survive the foragingof the chancellor and hisengorging of the taxationhoney-pot. Then it mustrespond to the end of thefunding black hole that isthe short-service refundholding account

Barry Parr, AMNT

Butcher: Transactions costs are the next battleground. That said, the question misses the point a little. Improving the efficiency of DC pensions will make less than 5 per cent difference to the member’s outcome. Getting them to pay an adequate contribution, however, can make a 50 per cent difference.

Better pensions will come from the following: (stop fiddling with the tax framework) + (fix governance) = (better engagement) + (more members) + (more money in) = better outcomes for all stakeholders.

Morahan: There is a real need to break down and fully understand the fund management food chain so that trustees can assess whether their scheme is delivering true value for members. It has become increasingly apparent that there is a level of opaqueness, akin to what existed within with-profit funds, and it is essential that the industry does all it can to show where fees are being earned and providing justification for these.

Dickson: The charging structures for DC schemes have come under close regulatory and governmental scrutiny. There is an interplay of factors that influence a pension member’s outcomes as opposed to a singular focus on cost – ie investment selection, contribution longevity, contribution levels, member engagement.

It will be interesting to see how these various aspects are measured by trustees and independent governance committees.

Byrne: There will be a move to focus more on the value of quality – in investment design, administration, and communication – rather than a singular focus on cost. In addition, with a competitive market for larger workplace DC schemes, attention will focus on smaller legacy DC schemes and making sure these reflect the new pricing norms. IGCs will lead on this. Freedom and choice will, of course, widen the focus from the savings phase alone to the payout period.

Charlton: The next chapter in value for money has to look at how members can really be helped. In an environment where most decisions have been removed from the DC process, we may never have members take responsibility for their savings. Perhaps default personal advice might help.