Greater DC flex forecasted to raise member savings

Measures, including allowing members to take a larger proportion of their savings as a lump sum and reducing the amount of pension income people need to use drawdown products, may encourage savers to prioritise their pension saving.

“I would expect to see people who are over 50 recognising the value of paying higher contributions now on the basis that they can get them back with full flexibility soon,” said Will Aitken, head of DC consulting at Towers Watson.

Matching contribution structures could become particularly popular with members in this age group, said Aitken. “You could find that these contributions start costing more than they did because of older people."

This could lead to such contribution structures becoming less popular with employers as a result of the increased cost of provision, he added. 

Data from the Office for National Statistics show the highest proportion¹ of DC members aged between 50 and 64 contribute between 5 and 6 per cent (see graph above). Further data from the ONS show a decline in scheme membership for the same age group (see graph below).

One of the long-standing gripes that people have had with saving into a pension has been how you can draw it, said Laith Khalaf, head of corporate research at investment platform provider Hargreaves Lansdown.

“That speaks of maybe a bit of a positive shift with how people view pensions now – they don’t have to hand over all their money to an insurance company,” said Khalaf.

This means there will be a huge need for education, he said.

“People are going to want to take control of their pensions but they’re not going to know how just yet,” he added.

However some employers could be persuaded to reduce their contributions if staff are not able to generate enough income to retire, said Richard Butcher, managing director at independent trustee company PTL.

“There will be a risk that these changes could cause employers to reduce their contributions because they can no longer use it as a tool to manage people out of the workforce,” he said.

Salary sacrifice could also become more beneficial for both members and employers, if members increase contributions.

It would mean more national insurance savings, which employers could put back into the scheme, Khalaf said.

Employers have started reviewing their default strategies as a result of this increased flexibility.

“[Default funds] are all built on the assumption that 90 per cent of the workforce will buy an annuity,” Khalaf said.

Employers will need to consider how much risk members would need to take and the fact that members may remain investors into retirement, he said.

¹The original version of this article stated incorrectly that the majority of DC members aged between 50 and 64 contribute between 5 and 6 per cent. In fact, it is the highest proportion of this age group (see first graph above).