What surprises us about current DC consulting is how little good it does; three of us sat down yesterday to work out how our firm could do something to improve the pensions arising from DC saving. We organised our thinking around the past, the present and the future.
Corporate DC pensions in the UK are littered with debris. Ten years ago there were some fifty companies vying to provide stakeholder pensions. Today there are less than ten credible players in the market. If your company established its pension arrangements with one of the 80% of failed or failing providers it’s time to re-think ,replace and re-promote. Even if you have established your company’s pension arrangements with a credible provider, it’s time to talk about the fees you (or more probably your members) are paying. The new benchmark for fees is not 1%, it’s the Nest Charging structure – a long-term charge on assets of 0.3%).
There’s even more scope for improving occupational DC plans; unbundled arrangements have the opportunity to embrace the new wrap technologies available from the large insurers which offer cheaper fees, better reporting and lower operational risks. Member record keeping services are now available either bundled with these corporate wraps or through the new web-enabled services offered by the better TPAs. The new breed of Mastertrusts offer a practical solution to the administrative issues surrounding deferred members.
Money purchase AVC arrangements also need review. Too often members too much for too little. Many trustees have little or no understanding of the wider opportunities for their members to concurrently save using more efficient and appropriate products including the new breed of low cost SIPPs. Similarly corporate sponsors are often overlooking the impact of AVCs on scheme funding .
Every organisation in the UK will have to re-consider their pension strategy in the light of auto-enrolment and the introduction of NEST. NEST will be available as a DC option from April 2011 and Auto-Enrolement is only a year away for some.
The continued closure of open DB schemes to future accrual is creating a supply side bottle-neck. Large providers are now at or near capacity for new business. Accessing good quality GPPs is likely to be an increasing problem.
The future is collective – the current system of collective accumulation and individual decumulation is bust. We urgently need to establish a means of collective drawdown using target dated funds. We need to find a way to pay scheme pensions recognising that the sponsors oc corporate DB plans no longer have the appetite to underwrite the longevity risk involved.
Thought leadership is one thing but what is needed is the collective will to turn good ideas into practice.
DC matters. Projected pots are now becoming accumulated pots but more importantly the drawdown of these DC pots is for many people now close at hand. Failure on behalf of companies to optimise the returns of DC accumulation is a corporate risk. With the abolition of the default retirement age , many employees with inadequate DC provision will have no option to work beyond a company’s anticipated retirement date. Companies no longer ignore their DC schemes.
The traditional areas of DC consulting concentrating on member communications and good fund and administrative governance are no less important than they have been. However – relative to the opportunities available to improve the legacy of the past, manage the challenge of the present and plan for they need to be placed in perspective.
What really matters in DC is that DC pots provide the best possible pensions. Outcomes are everything.
Much of this is easy. DC consulting concentrates on the hard things and misses the easy ones. What we need is a pragmatic and plain-speaking approach to DC pensions and that is exactly what we’ve decided to provide.