The DC Future Book
2022 sees the publication of yet another highly informative edition of The DC Future Book, the 8th in the series, underpinned by the PPI’s fiercely independent approach to Defined Contribution (DC) research. The DC Future Book continues to promote a better understanding of trends and themes in the UK DC pensions market and as always, there are plenty of facts and figures to pique the interest of even the most experienced DC practitioner. So, what are the key findings of this year’s research and what actions should be considered if good retirement outcomes are to become the norm?2
Old age dependency ratio
The poor substitutability of DC for DB
Automatic enrolment
Then there’s the nation’s 4.1m self-employed, who are also excluded, few of whom have any notable pension provision. The PPI helpfully cites NEST’s robust research findings and trials into how to encourage higher levels
of pension saving among the self-employed – measures which have also yet to be acted on.
Median DC pot sizes
Asset allocation
The PPI’s annual DC Asset Allocation survey continues to grow in stature, providing us with ever greater insight into the investment strategies run by participating schemes, which collectively manage around 24.5m DC pots. It’s reassuring to see continued healthy levels of active management and increasingly greater diversification of default fund asset mixes, though there’s still a way to go in embracing more governance-intensive and genuinely diversifying less liquid asset classes, given the positive cash flow and ultra-long investment horizon of most DC schemes and DC savers.
Accessing DC pots
The ongoing impact of the pandemic has continued to see fewer DC savers access their DC pots for both annuitisation and income drawdown compared to pre-pandemic levels. However, full withdrawals have increased above pre-pandemic levels while partial withdrawals have also increased substantially, possibly as a result of cost of living pressures. Although the number of Pension Wise telephone appointments and self-serve website journeys continue to increase, disconcertingly a recurring theme remains the increased numbers of those at retirement not seeking regulated advice before purchasing an annuity or income drawdown, at 84% and 40%, respectively.
DB transfers
Another concerning statistic, highlighted by the report, is that almost 3,000 people, 8% of those in receipt of independent financial advice, insist on transferring their DB benefits to a DC fund when advised not to do so. Thankfully, the FCA continues to work on improving guidance for those advising on DB transfers.
Aggregate DC assets and active DC savers
How will high inflation impact DC investment strategies?
Finally, the thematic chapter of this year’s publication shines a spotlight on both the immediate and prospective future impacts of high inflation on DC schemes’ investment strategies. The DC Future Book notes that the last time when inflation was prompting the sort of investment conversations we’re now having as a pensions community was way back in the ‘80s/early ‘90s and before that in the ‘70s. As we know, and as some of us have experienced, rapid increases in inflation, particularly if sustained over prolonged periods, can erode DC pots in real terms and compromise later life outcomes, if returns achieved by the chosen investment strategy do not match the rate of inflation.
Moreover, against the backdrop of rising energy costs, global supply chain and labour shortages, conventional and even less conventional economic policy levers may not be as effective as when managing demand-led
inflationary pressures. Therefore, an analysis of the prospective resilience and effectiveness of a multitude of asset classes during periods of high inflation is particularly welcome. Thankfully, since the ‘70s, ‘80s and ‘90s, a considerable number of asset classes offering either implicit or explicit inflation hedging have been developed, some of which have become increasingly prevalent in pension portfolios.
Of course, DC investors need to be alive to and prepared to adapt to a range of inflation (and growth) scenarios. That said, inflation is but one risk for DC investors to manage. Indeed, if the current high levels of inflation are not expected to persist and to not have a material impact on the long time horizons of most DC investors, then DC decision-makers shouldn’t make large scale asset allocation shifts. After all, the explicit and opportunity costs of doing so can be considerable. Equally, now is not the time for complacency. With the ever-present threat of largely unforecastable future economic and market shocks lurking on the horizon, DC investors should continually assess the robustness and resilience of their portfolios to all manner of risks.
Why does this matter?
The DC Future Book explicitly recognises that, having moved from a system of generous pension provision, collective passivity and certain outcomes, where everything was done for you (DB), to one that is increasingly less generous, with individual responsibility and less certain outcomes, where everything is down to you (DC), addressing the inadequacy of retirement provision is fast becoming the UK’s biggest socio-economic challenge.
Aside from being a valuable reference document and an invaluable source of DC thought leadership and of informed debate and discussion, in reaching out to all stakeholders – policymakers, regulators, providers and practitioners – The DC Future Book is also a catalyst for change. In particular, the report implicitly recognises that, with continued policy inaction, a whole generation of people are potentially facing a worsening retirement outlook. This includes many of the nation’s 4.1m self-employed, who increasingly operate in the gig economy, with its meagre pensions uptake and, of course, those 10.5m employees likewise excluded from AE by virtue of their age and/or earnings.
Moreover, even those who do meet the AE criteria or who participate in other qualifying pension schemes simply do not, on average, save enough to generate a moderate, let alone a comfortable, standard of living in retirement. This is evident from current and future projected median DC pension pot sizes. Then there’s the dwindling numbers using independent financial advice when accessing their pots.
