Talking head: Our columnist Ros Altmann gives her take on how next year's challenges for both DC and DB schemes will be played out, including auto-enrolment, default funds and DB-DC transfers.
The new rules pose huge challenges – and opportunities – for everyone involved in UK pensions. Will the majority of defined contribution pension savers just cash in their pension funds? I do not think so but clearly there is that risk.
This poses a challenge to the industry to make pensions sufficiently attractive that customers wish to leave their money alone, rather than taking it out of the pension wrapper. I expect it will mainly be those with small pension funds that take the money, while most larger funds will remain in place.
Trustees need to make sure the risks of members giving up DB pension rights are clearly explained
Default funds for DC accumulation will need to be redesigned, changing lifestyling funds to accommodate people’s increasingly flexible later life.
Traditional one-size-fits-all products are no longer suitable, as fewer people will retire completely at a preset date or buy a standard annuity with their fund.
Which means, of course, that new products for DC decumulation will also be required.
These can include bank account-style pensions – perhaps with debit cards attached – or funds that combine long-term diversified investment growth during retirement with some downside protection against poor market performance. Annuities will still be part of the mix, but possibly for later in life and more individually underwritten.
Auto-enrolment will continue rolling out to smaller employers and most new schemes are likely to be DC, with very few defined ambition funds.
The challenge for defined benefit pension trustees will be around managing member requests to transfer into DC.
On the one hand, if many deferred members with small entitlements transfer this should improve scheme funding, while also improving security for members with larger entitlements. But on the other hand, trustees need to make sure the risks of members giving up DB pension rights are clearly explained.
The government’s new free pensions guidance service – promising help with pension choices for everyone reaching pension age after April 2015 – should be promoted widely. This is another opportunity for the pensions industry to develop new products, apps and services that will help with financial education for savers.
Political uncertainty or EU exit fears may increase gilt yields, which could improve annuity rates and corporate pension deficits.
Depending on who wins the election, a new government may review pensions and later-life incomes, possibly considering changes to tax relief, auto-enrolment and pensioner benefits. It is likely to be another interesting year for pensions.
Ros Altmann is the government's champion for older workers
