CAMRADATA, a provider of data and analysis for institutional investors has published a new white paper entitled, ‘Driving Change and Choice’based on discussions at its annual Defined Contribution (DC) Pension Roundtable among an expert panel of investment managers, pension consultants and asset managers. The event was sponsored by BlackRock and First State Investments.
The White Paper analyses how pension scheme provision in the UK is faring following changes introduced to the DC market over the past year. Its other major theme is looking at how to transform the UK from a nation of savers to a nation of investors.
Sean Thompson, Managing Director, CAMRADATA said, “Since our last DC roundtable event we have been encouraged by generally positive changes that have taken place in the DC market. However, a key issue is that members are not investing enough into their schemes.
“Our mentality needs to change from merely accumulating wealth until we reach pension age to considering when and how it will be deployed across the whole of our lifetime. The White Paper includes interesting proposals from the panel of experts on how this could be achieved.
“Everyone agreed that raising people’s interest in financial services and pensions is paramount and that employees need to be more engaged with their pensions on a personal and emotional level. They need to understand the reality behind the numbers and jargon and visualise what this means in terms of the kind of retirement lifestyle they can expect.”
The roundtable began with a consensus that the rate of savings needs to rise to 15% of salary. The current average across all types of DC in the UK – adding members and employers’ contributions together – is just 4%.
Claire Finn, Head of DC, Unit-Linked and Platforms at BlackRock, noted that 15% was the DWP’s recommended contribution rate. BlackRock supports this target and its recent research found that 70% of respondents would like a mandatory rate of contribution set by government.
Exactly five years after auto-enrolment started, however, there is no timetable to escalate the mandatory rate from 8% after next year. Andrew Harman, DGF portfolio manager at First State Investments, endorsed the notion of contributions rising progressively over time. He said, “Little changes compound over time; start earlier and contribute more.”
Key findings from the White Paper
The panel had three main suggestions on how to transform the UK from a nation of savers to a nation of investors:
- Connect pension scheme members to their investments by reminding them of where they go in the real world, i.e. getting people to realise that they are financiers and their capital funds society’s needs such as new hospitals and roads.
- Focus on an inflation-plus target – or real return. This would give members a more realistic sense of what their assets were delivering as an outcome, in contrast to reporting DC wealth as a lump sum.
- Concentrate on wealth through retirement, reflecting how people now have income from various sources to draw on at different times. The panel proposed that Master Trusts could evolve to offer more holistic financial provision tailored to individual needs. Drawdown also becomes a greater element in whole-of-life investing.
Alan Emberson, PS Aspire’s director of workplace solutions highlighted that young workers should be saving as much as possible, as quickly as possible, and in several different forms, not just their pension scheme.
He said, “The salary pot may not be increasing, but we can help people spend their hard-earned income in a more effective, flexible and efficient manner.”
Meanwhile, Helen Stokes, senior investment consultant at advisory firm, LCP, warned that those other financial considerations, such as buying a house, meant that twentysomethings simply don’t have the capital to put aside substantial amounts of income into pension saving. She warned, “I fear a mandatory contribution level of 15% would put young people off.”
Lydia Fearn, head of DC at another consultancy firm, Redington, agreed with Stokes that 15% could be for some people “unattainable”. Fearn did note, however, that pension contributions were gaining popularity with younger employees where they formed part of an overall package of benefits.
The panel then discussed the impact of Pensions Freedom introduced two years ago in the UK, which has seen many people clear out their DC pot aged 55, in a trend dubbed “Ferrari freedoms” by critics.
The CAMRADATA panel was quick to point out, however, that this kind of behaviour is often conducted by those with other forms of saving, including Defined Benefit pensions. For this golden generation, emptying a minor DC pot aged 55 resembles the use of a DB lump sum at retirement: it affords some luxury – a camper van or a Ferrari – but can hardly be termed irresponsible.
The panel was more worried about the next generation, without DB savings, who might be tempted to take DC wealth earlier and leave themselves destitute as a result.
Niall Alexander, head of DC at consultancy P-Solve said, “At the moment DC constitutes relatively small pots. In 20 years’ time, these pots will be people’s mainstay, so we need to consider DC in the context of outcomes. The days of DC being “play money”, so invest in equities and hope for as much growth as possible, are over.”
The CAMRADATA panel was worried by the ramifications of Pensions Freedom. Alan Emberson warned that the tradition of a hard switch from accumulation to decumulation, realised previously by an annuity transaction at the point of retirement, has in effect been ruptured.
He said, “We need to support a more seamless journey from the point an individual leaves employment and begins to draw funds from their accumulated assets.”
The panel went on to discuss the greater need for education and that technology could be used to improve member education and, consequently their choices. Using technology to communicate with members about relevant decisions at relevant times could help members engage with their pension savings.
The end of the discussion came back to the big challenge of permanently raising workers’ interest in the financial services they use and rely on. Lydia Fearn said that investor education hitherto had failed in its attempts to enthuse savers.
Instead, she proposed something more radical than nudges and apathy. She suggested the links between retirement capital and the world at large had to be demonstrated to illustrate to savers where their money goes.
Lydia Fearn said, “It doesn’t just go to big, bad companies. It builds roads and hospitals; vital parts of our country. The kind of stuff that keeps society going. If pension scheme members knew this, they might feel more of an emotional connection with their pension.”
In conclusion, the panel agreed that this could be one path to convert the UK from a nation of savers to a nation of investors.
Sean Thompson, Managing Director, CAMRADATA said, “UK employees need to become more engaged with pensions or else they could face a very bleak future. Greater financial education is vital and more employers and providers are looking to ways to provide it. This DC discussion was very enlightening and the White Paper a must read for all those involved in pension provision.”
Click here to download the White Paper.