Shantel Okello of the Pensions Policy Institute explores how the DC market has evolved over the past decade and looks forward to what it may look like in another 10 years’ time.
The UK pensions landscape has undergone many changes over the past decade, particularly within the defined contribution (DC) pensions sector.
This year’s DC Future Book, published in association with Columbia Threadneedle Investments, marks its 10th edition – a milestone that provides an opportune moment to reflect on past trends and consider the future landscape of DC pensions.
The focus this year is on analysing these transformations and offering insights into the future direction of DC pensions.
A decade of shifting responsibilities
The past 10 years have been characterised by a significant transfer of responsibility and risk from employers to individual members.
This shift was propelled by the continued closure of private sector defined benefit (DB) schemes and the corresponding rise of DC schemes, significantly driven by the introduction of automatic enrolment.
As a result, individuals now bear greater responsibility for their retirement security, facing the complex task of making decisions about accessing and managing their pension savings.
This shift in responsibility has necessitated robust support systems including guidance and soft defaults to help members navigate retirement planning, but these are not yet in place and time is running out for some.
Efforts to mitigate the risks associated with DC savings have intensified, leading to the implementation of various policy changes. Initiatives such as the Value for Money framework and small pots consolidator models aim to address inefficiencies within the DC pension system.
As these policies develop over the next 10 years, it will be important that focus remains on member outcomes and on keeping costs at a reasonable level.
Technological advancements and innovation
Looking ahead, technological advancements such as artificial intelligence will play a crucial role in shaping the future of DC pensions.
Pensions dashboards, for instance, are set to change how members interact with their savings by providing a consolidated view of retirement funds on a digital platform.
This increased accessibility could help some individuals to make more informed decisions, but it will be crucial to ensure members are aware of the dashboards and actually use them.
Similar concerns will apply to the development of digital guidance and financial advice facilities.
While policy initiatives aimed at improving investments and enhancing DC member outcomes are promising, they are not without their challenges.
The Value for Money framework and pensions dashboards, for example, have the potential to provide significant benefits, but their success will depend on effective implementation and industry adaptation. The technology should be reliable and user-friendly, and pension providers will also need to integrate the dashboards with their existing systems.
There is no guarantee that these initiatives will proceed as planned or that they will achieve their intended outcomes without problems.
Government and industry collaboration on investment strategies
The future success of DC pensions will depend on close collaboration between the government and the pensions industry.
The investment landscape is evolving, with a gradual shift from traditional equity and bond portfolios to alternative assets, including illiquids and private markets.
The government’s push for increased investment in private equity and other productive assets is likely to lead to greater use of private markets. This diversification aims to improve member outcomes by offering access to potentially higher returns and reducing reliance on volatile public markets.
However, these moves must be carefully managed to ensure that schemes continue to prioritise the needs of their members and that market supply issues do not lead to scarcity.
Issues such as access to these assets and the size of schemes could hinder further development. Additionally, there needs to be consensus on how assets are defined to ensure clarity and consistency across the industry.
The future is likely to see the consolidation of DC schemes, resulting in fewer but larger schemes with more assets and big individual pots, making further diversification more feasible.
This consolidation could help overcome some of the barriers smaller schemes face, enabling a broader range of investment opportunities and ultimately enhancing the retirement outcomes for members.
Conclusion
The 10th edition of The DC Future Book provides a comprehensive analysis of these trends and offers a forward-looking perspective on what the next decade may hold.
By reflecting on the past and anticipating the future, the industry and government can develop the necessary policies and strategies to support members in navigating these changes and securing positive later life outcomes.
Shantel Okello is a policy researcher at the Pensions Policy Institute.
