DC pensions: Lengthy engagements
Pension providers constantly face the challenge of keeping employees engaged with their pension scheme and the importance of this challenge is made to feel more important when the latest figures for the growth of defined contribution (DC) funds are considered.
The industry is past the tipping point because, for the first time on a global basis, the pensions industry is seeing DC assets exceed defined benefit (DB) in the seven largest pension markets. The Willis Towers Watson’s Global Pension Assets Study shows that DC assets grew 8.9% over the past ten years, while DB assets grew by 4.6%.
The figures reflect the swing away from the old-world DB system of ‘guaranteed’ pension payments, towards DC, where employees are left with no pension guarantees and a pile of investment risk.
The figures bely the fact, though, that DB is still strong. In the UK, 82% of the market is still invested in DB assets, according to the Willis Towers Watson research.
But this is set to change. There are now 15 million people invested in DC schemes totalling around £400 billion and the Office of National Statistics has stated that UK employees paid more into DC pension schemes than DB for the first time last year. That’s £4.1bn for DC, versus £3.2bn for DB.
Against this backdrop UK employers have been pressured to increase their own contributions to ensure that a minimum overall contribution rate to DC pensions hits 8% from April 2019.
It seems, though, that the message that people must save more for themselves is getting through. Of course, a little regulatory nudging has helped. But the challenge for employers is to keep people engaged so that they regularly increase their contributions.
And when you consider that the average 25-year-old today can expect to live until 91, that’s going to require many years of effort.