DC reinvented – addressing the challenges that lie ahead
With revolution replacing evolution in UK DC pensions, Chris Wagstaff, Senior Visiting Fellow, considers the challenges that lie ahead for the world’s fastest growing DC market and what the key ingredients are for engineering good DC member outcomes to and through retirement.
Although Defined Benefit (DB) remains the dominant pensions structure in the UK by size of assets, the focus is now firmly shifting to Defined Contribution (DC). Indeed, with 85 per cent of DB schemes now closed to new members, the UK's position as the world's fastest growing DC market since 2001 looks set to continue.
Revolution is replacing evolution in DC pensions, with the imminent move from collective passivity to individual responsibility in the decumulation phase, and the focus is now on achieving good outcomes in retirement as much as at retirement.
Chris Wagstaff, Senior Visiting Fellow at Cass Business School, considers what this revolution holds for UK DC market. In this paper he discusses the potential pitfalls of this new market direction. The potential for pensioners to run out of cash is one consideration and has been much discussed in the media.
The experience of the Australian market, where a system of not requiring annuity purchase has been in place for two decades, is contemplated, and a thorough examination of what is required to achieve good financial outcomes for members is provided.
The paper concludes that it is unlikely all requisite structures will be in place when the new pension freedoms in April are introduced. However, with DC pot sizes still relatively small, it is unlikely that large numbers of retirees will seek to take up more sophisticated decumulation options in April. In fact the paper deems it likely that many people will stay with their current plan for the next two to three years, as some confusion about the change in April still exists amongst those eligible to move into the decumulation phase. In view of this, the paper stresses the absolute importance of installing the right structures, behaviours and rules to ensure poor decisions and outcomes are minimised.
The full paper can be downloaded at the link below.