Richard Birkin, Head of DC Pensions Advisory, provides an outlook on DC pensions for the year ahead.
2019 will be a record year for transferring defined contribution (DC) assets between structures
There are four main reasons for this. First, increasing governance requirements means current structures are perceived to be higher risk. Second, employers seek to offer members easier access into the retirement stage. Third, running costs are increasing. And fourth, auto enrolment contribution levels are closing in on more generous structures - this is leading to employers consolidating multiple schemes.
Flexible workplace savings on the increase
On top of this, the alternatives to a DC pension are also gaining popularity. Offering employees a clear approach to flexible workplace savings (mainly ISA products) has moved up the agenda. But in many cases, at least for now, these are more of a ‘nice to have’ and many employers are laying the foundations for future changes. Employers that are looking to stand out from the crowd are the ones moving the dial on wider workplace savings integration and employee financial education to support choice.
It’s not always a straight forward move
Where relevant, trustees and employees will need to check scheme rules. For example, they should consider any underpins, member protections, contracts of employment and links to defined benefit (DB) schemes or sections. And then there is the planning and costs associated with transition, including future member charges. Setting aside scheme specifics, the transition gets easier after the initial master trust authorisation, but the assessment process and need for a robust audit trail shouldn’t change.
Too much choice
Even if we set aside the contract based offerings and only focus on the more popular master trusts, there’s a vast choice. It’s essential to map out objectives, member needs, trustee requirements, and key aspirations in a well thought through design phase – taking care to make sure the design is future-proofed. A major focus of this stage will be the default investment structure – the differences in the make-up of the default structures across the providers is a (long) article of its own!
Navigating that choice
Where a firm has both advisory and ‘provider’ offerings this inevitably raises the question of independent advice. Employers, and particularly trustees, are increasingly keen to separate the two in order to demonstrate a clear independent audit trail at design and procurement stage. Indeed, those advisors with their own solutions are flagging this with their clients themselves early in discussions. Ultimately, the client’s specific requirements and design features should help filter the provider market down to a more manageable number.
Can providers cope?
Vast shifts in assets and members may be the goal of the underlying providers, but the master trust trustees themselves will need to be comfortable that the infrastructure can cope. Specifically, there’s a fear that we’re storing up a capacity crunch for when ceding employers and trustees give the green light to the chosen provider post-authorisation. Clear timelines, milestones and implementation planning will become even more important.
My predictions for the year ahead
In addition to significant asset movement between DC vehicles, I predict development (and perhaps even implementation!) of wider work-based flexible savings offerings. I also foresee (and welcome) improved financial education for employees and more employer-led oversight committees to monitor providers’ performance. And if that’s not enough change, I think we can also expect a step up in the movement from contract-based to master trust, further evolution of default structures, and, I’m sure, greater governance scrutiny.