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11-06-2019

DC or DB pension - some people will always behave the same

When I started work in the 1980s my manager informed me that I had been auto-enrolled into the company pension scheme. I was told I wouldn’t have to pay anything but that if I kept my nose clean and did 40 years service I would have a two thirds pension when I retired. I nodded and thought nothing about the pension scheme after that.


Lots of things have changed since then - the typing pool has gone, along with the defined benefit pension scheme, but it seems that attitudes to pension saving remain relatively constant. Aviva’s Working Lives Report has revealed that after being automatically enrolled nearly 1 in 5 employees in small businesses admit that they are unaware of where their pension contributions are being invested. If we look at the figures across all employees in the private sector, it means close to 1.5 million people do not know what is happening to their savings. I predict that figure will grow as the auto-enrolled population expands.

By Dale Critchley, Technical Reform Manager, Corporate Benefits, Friends Life, part of the Aviva Group

  
 When I was enrolled engagement didn’t matter so much. Investment risk lay with my employer. With defined contribution the risk is of course transferred to the employee. Unfortunately, like a reluctant game of pass the parcel, employees don’t seem to want to grapple with investments or even acknowledge it is their turn to take control.
  
 Engagement is one answer to this problem - finding some way to make pensions more interesting than Coronation Street or watching cats on YouTube, or whatever else it is that people would rather do than look at their pension scheme or learn about investments. New messages, new formats and new media are all being deployed. The prize is two-fold: for the employee a potentially better lifestyle in retirement and for the employer a greater appreciation of their benefit package. It will work for some people, but for others cats are just too cute.
  
 For this group, good governance is crucial. The default investment funds need to be as good as they can be with scheme sponsors sharing in the responsibility for good member outcomes. Investment defaults need be designed to provide the very best outcomes available within the price constraints set by the charge cap. Default contribution levels should aim to provide an income people can afford to retire on, not simply what they can easily afford today.
  
 The best answer is of course to do both, to deliver good communication so that people understand and appreciate what the scheme defaults are doing for them. If we can get both right we could create DC schemes that, like DB, are appreciated as a valuable benefit but allow their members to freewheel into a relatively prosperous retirement, without making difficult choices.

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