Defined contribution adequacy and stagnant investments were key concerns for trustees in 2016, so what do experts think the new year has in store for DC?
The overarching theme for 2017 is likely to revolve around encouraging people to save more into DC pensions while working towards improved DC adequacy, according to experts.
No matter how well-tuned the machinery is, we’re still not going to produce good outcomes if people aren’t paying in decent levels of contributions
Richard Butcher, PTL
Greater focus on DC governance and tightening control on trustee standards have also been highlighted as dominant themes next year, not least for mastertrusts, after Labour peer Jeannie Drake recently proposed to amend the Pension Schemes Bill to introduce "a compensation fund or provider of last resort when a mastertrust fails".
Driving up trustee standards
John Wilson, head of technical at JLT Employee Benefits, commented that the Pensions Regulator “has been getting a lot stricter” on DC governance, “so I think providers and trustees of occupational DC schemes are going to have to make sure that they’ve got their management and oversight correct”.
Richard Butcher, managing director at independent trustee company PTL, noted that the regulator’s consultation on what makes a good 21 should help raise trustee standards over 2017.
He also mentioned the fact that there will be a consultation on what should be expected of a professional trustee.
This is significant “because the big DC winners over the last few years have been mastertrusts, and by and large the trustees of those are professional trustees”, said Butcher.
“Hopefully it will significantly drive up standards for professional trustees, because at the moment any Tom, Dick or Harry can be a professional trustee,” he added.
Ian McQuade, director at consultancy Muse Advisory, noted that the regulator's new DC code and guides that were launched in 2016 “are now fully in force”.
Consequently, he said, “it is clear that the Pensions Regulator expects all trustees, including those with AVC schemes, to be stepping up to the plate”.
But despite legislative and regulatory focus on good governance, 2017 should also bring a chance for DC providers to focus on making some much-needed changes, according to Mark Futcher, head of defined contribution at consultancy Barnett Waddingham.
He explained that 2017 might be the time for providers to “actually do some of the improvements they wanted to do” and work towards “constructive enhancement to DC”.
Ramp up contributions
A recent retirement income adequacy report released by the Pensions and Lifetime Savings Association revealed that of the 25.5m people in employment, 1.6m are still at high risk of falling short of a minimum income standard in retirement.
The research found that minimum contributions under automatic enrolment need to be bumped up to at least 12 per cent.
With the 2017 auto-enrolment review not addressing adequacy questions, what is the outlook for contribution levels in the new year?
“We need to get people to pay more money into pension schemes, and no matter how well tuned the machinery is, we’re still not going to produce good outcomes if people aren’t paying in decent levels of contributions,” said Butcher.
He said he hopes that the outlook next year is a realistic assessment of the amount of money that needs to be paid into a DC pension scheme, and that legislators and regulators take action with regard to driving up the amount of money in DC.
Tim Middleton, technical consultant at the Pensions Management Institute, also said he hoped for increased focus on the adequacy and rates on contributions that are being paid.
“I imagine there’s going to be more discussion now about what has to be done to get the public to appreciate that they’ve got to pay more into a DC pension scheme than they’re doing at the moment,” he said.
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Increasing investment returns
Middleton also commented on “continued poor returns from DC investments” and how this is unhelpful when persuading people to save into a pension scheme during a period of sustained low returns.
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As a result, he said, there will be more of an emphasis on “what kind of investments might be more attractive given the rather stagnant state of the market”.
McQuade said that the latest ideas of factor investing and bringing illiquid assets into the DC space are likely to receive a lot of coverage during 2017.
He said that bringing some of the best investment thinking into DC schemes "should be possible” but also noted that schemes “may need to give up daily dealing to allow some of those things to happen”.
