What’s in store for DC pension schemes in 2024?

The defined contribution (DC) world is undergoing a huge transformation. Increased assets are flowing into DC, prompting much more attention from regulators, asset managers, and the government.

For example, the UK’s largest master trust, Nest, has over £30bn of assets under management – and is forecast to have £100bn under management by the end of the next decade. Every month from March 2022 to March 2023, Nest received £543m in new contributions to its members’ pots. This will only grow over time.

With such rapid growth, important questions must be asked about how DC assets are managed to maximise savers’ chances of a comfortable retirement. Let’s consider some of the issues set to affect DC in 2024 and beyond.

Consolidation

The government and the Pensions Regulator (TPR) are encouraging schemes to consolidate. TPR’s chief executive, Nausicaa Delfas, has made it clear at numerous industry events that unless small schemes can match the standards of their larger counterparts, they should consider joining master trusts.

Steve Leigh, associate partner at consultancy Aon, says: “The consolidation of single trusts into master trusts is a trend that’s been going on for five years or more. And I would expect it to continue this year.”

He adds: “Every time we see new pieces of regulation, it’s another reason for people with single trust schemes to think: is this still the right model from a company perspective, but also from a ‘delivering the best outcomes to members’ perspective? In a lot of cases, trustee boards are getting to the stage of thinking actually, there’s too much to do, there are too many new things to learn. It’s better if we pass this to a professional board of trustees under a master trust arrangement.”

Leigh caveats: “We have seen a little bit of pushback towards the back end of last year and possibly will this year from sponsors, particularly with hybrid DB and DC arrangements, because these schemes are suddenly a lot more well-funded than they have been for many years They are starting to see consider using some DB surplus, if they have it, to fund DC contributions, potentially saving an employer significant amounts of money.”

Mansion House reforms

There is consensus across the political spectrum that UK pension assets could work harder, and that this could drive growth in the domestic economy, as well as improving returns for savers. The ‘how’ part is slightly trickier – but experts anticipate developments in 2024.

Aon’s Leigh says: “I think this year it is going to be a big topic. We will see more schemes needing to take action. Certainly organisations – including Aon – that have signed up to the Mansion House compact have committed to action over the next 12 months. This doesn’t necessarily mean allocating money into private markets, but it certainly means taking some concrete steps to in order to do so.

“I think what we will see over the over the next 12 months is more funds being launched that can facilitate investment, because at the moment there isn’t a huge range of private market funds. I hope to see perhaps some more nuanced funds in the private space.”

Leigh explains that many private markets options for DC schemes take the form of multi-asset funds, but more specialist funds would be “useful” to improve choices within private markets in areas such as fixed income, property, and private equity.

“In the private market space, it would be good to see some private equity funds or some infrastructure funds or private debt funds, rather than amalgamated versions of those types of funds,” he says.

A lost generation?

While DC assets are increasing rapidly, the pensions industry is greatly concerned by the prospect of a ‘lost generation’ of savers. Today in their forties, most will not have enjoyed access to defined benefit (DB) schemes.

This generation of savers would have been auto-enrolled later than 18, and what DC savings they do have may well have been made at less than generous minimum contribution levels. Because they have been auto-enrolled, they may well think the amount they are putting aside will stand them in good stead for retirement.

To improve retirement outcomes for this generation and their younger counterparts following them through the DC system, top of the industry’s wishlist is an increase in auto-enrolment minimum contributions. However, this does not seem to feature on the government’s agenda at present.

Paul Waters, head of DC markets at Hymans Robertson, says: “Adequacy remains a massive issue for DC pension members. The auto-enrolment minimum is currently not enough for good long-term outcomes and needs to be raised to 12%. 

“Time is running out for those with DC pensions and inadequate contributions to gain a good retirement income. So, there must be legislation to allow pension schemes to default members into post-retirement options to give them a genuine whole-of-life pension solution.

“Innovative retirement solutions exist that could deliver better outcomes – such as longevity pooling – but a default approach would enable these to flourish and the government must encourage this.”

However, with a general election on the horizon and a cost of living crisis making life difficult for savers, an increase in contribution rates may not be top of the government’s agenda.

Aon’s Leigh says: “Coming off the back of the cost living crisis, what we’re seeing in some of our research is that it is only now starting to impact people’s pension saving behaviour. There was a lag between it being in the news and on everyone’s agenda to now, where we’ve seen a big increase in the number of schemes saying that people are cutting contribution rates and more are opting out than ever before. More people are accessing pension savings early.

“I think we need to be mindful that there is a cost of living challenge for people. It would be helpful to have more of a grown-up, nuanced discussion about actually: what are the right targets for different people?”

Guidance and advice

In December 2023, the Financial Conduct Authority (FCA) published a paper exploring how the industry can achieve a middle ground between guidance and advice.

Hymans Robertson’s Waters says: “2024 must be the year that there’s big effort put into solving issues about the advice and guidance boundary around which financial services institutions can deliver personalised guidance to help customers make decisions. 

“The latest proposals from the FCA on ‘targeted support’ could be instrumental in delivering better outcomes. If the proposed new policy is implemented effectively, it will then be up to the industry to deliver the solutions members need, and we encourage providers to be bold and be decisive in making this happen.”

Pots for life

As Pensions Expert reported last week, the industry has greeted the ‘pots for life’ consultation – where savers would take their pension pot with them through their working lives, rather than building up multiple pension pots with different employers – with a mixed response.

Although some have welcomed the benefits to consumers, others have questioned the “costly administrative headache” it could cause.

Gary Smith, partner at wealth manager Evelyn Partners, is one of the sceptics. As well as pointing out the administrative challenges, he adds: “It’s not clear what sort of pension providers will be allowed to offer a ‘pot for life’ – the large-scale collective DC funds that service the Australian system largely don’t exist here, so would it be a hotchpotch of those currently involved in providing pensions, like insurers, investment firms and self-invested personal pension platforms?

“That is where the consultation will doubtless focus and it will be a long time before such a system could even begin to be established. Even for savers themselves, it could be a case of ‘be careful what you wish for’. It’s not difficult to envisage a bit of a ‘wild west’ emerging in the bunfight to grab personal pension business, including scams and sharp practice, where well-informed and engaged savers might benefit while others might be more at sea.” 

It’s an open question as to whether pots for life will go ahead. The government seems to be in listening mode at present. If it decides to move forward, judging by the length of time it has taken to get another ambitious project – pensions dashboards – off the ground, it would no doubt take some years to come to fruition.

Looking to the year ahead, what’s clear is that as DC grows, the government and industry alike are not afraid to question the status quo. Continuing to ask profound questions about investment, adequacy and governance can only be in savers’ best interests.