The switch in focus from DB to DC, the increase in the numbers enrolled in workplace pensions, and the fact that people are living much longer, means there needs to be more focus on 'at retirement solutions' and on post-retirement support.
Speaking at the launch of a new PPI report entitled: 'What can the UK learn about other countries’ approaches to accessing DC savings?', Nausicaa Delfas, chief executive of The Pensions Regulator said the UK has the second biggest pensions market in the world but less than a fifth of our pension assets are in defined contribution pensions.
In the United States and Australia that figure is much higher, at 65 per cent and 87 per cent respectively.
“Their experience provides us with an opportunity,” Delfas said. “To draw from their learning and look to the future.”
The needs of future generations will be different to today’s retirees, said Delfas, explaining three areas for consideration: declining levels of home ownership and later starts on the housing ladder, lower levels of pension income and savings to draw upon and higher dependency on DC pensions where savers hold the risk for their investments.
These pose challenging choices for savers, who will have to consider how best to convert their pension pots into an income, she explained.
Over the next decade the assets held in DC workplace schemes by over-55s in work, will increase by nearly threefold to £527bn, with average pot sizes reaching £50,000.
“At that point DC workplace schemes will become the largest proportion of the retirement market,” she said.
“But, the welcome growth in workplace pensions provided by automatic enrolment (AE) comes with a challenge as pensions mature.
“Accumulation has come about by inertia. Decumulation will require activity.”
Delfas said many beneficiaries of the AE system have not had to engage much to save but turning that pot into something that supports their individual retirement needs will require them to be much more engaged.
“It’s here they need our help,” she said. “This insight informed DWP’s consultation on reforming decumulation policy.
“In the near future, DWP will respond to that consultation and set out the next steps. We support the direction of travel and have been working with them to help shape these reforms.”
What does ‘good’ look like?
The experience in Australia and New Zealand is that reform should be guided by a consensus on what good looks like, and how it is assessed.
If that consensus does not exist, the positive outcomes sought for savers will not be realised.
Delfas said she would like to start building consensus on what good looks like for the UK by proposing five principles to help shape the conversation.
- Principle one – All savers deserve value for money – Schemes should help savers to maximise the value of their pension savings into and throughout retirement
In accumulation, value for money means the investment returns, and services received, for the price paid.
In decumulation, it’s not quite as simple but what is clear is that the focus has to be on a holistic assessment of value, not just cost alone.
