A new generation of defined contribution (DC) plans must be developed to deal with challenges such as adequacy, technology, and a lack of engagement with participants, according to the Thinking Ahead Institute, a not-for-profit investment research and innovation member group originally developed by Willis Towers Watson.

According to the unit, the DC system needs to move beyond its role as a tax-effective savings vehicle, becoming more customised to individuals’ circumstances, more cost-effective, better governed and more tech-savvy.

In a paper, it said that DC “version 2.0” is now emerging, but forecast “version 3.0” appearing in the next 10 years, characterised by hyper-customisation and integrated whole-of-life wealth management.

Bob Collie, head of research at the Thinking Ahead Institute, said: “The history of DC has largely been a story of evolutionary happenstance, rather than of working to a master design plan. DC has become the world’s dominant pension vehicle, and work is needed if it is to live up to the responsibilities of that role. The next few years will be pivotal.”

The paper, Shifts for the DC organisation of tomorrow, drew on a survey and interviews of 10 leading DC organisations across four continents. The median DC asset size was around US$80bn (€72.5bn), with a median DC participant base of 900,000 people.

The study covered participants’ mission, operations, governance, investment member engagement, retirement income strategies and sustainability.

‘Role of sponsoring firm may diminish’  

In terms of the sponsor’s role, the institute said there are issues of industry structure and commitment in the face of structural change.

“The role of the firm as a pension sponsor may diminish as an evolving industry structure emerges in which specialist pension delivery platform organisations play a greater role,” it said.

The institute said post-retirement arrangements were currently primitive, and that better design requirements for post-retirement income arrangements include choice architecture and the development of a market for longevity tail insurance.

The governance standards of the organisations surveyed by the Thinking Ahead Institute were seen as high, with 93% saying they make effective use of their investment managers, with clear mandates.

However, member engagement appears to be more challenging, with only 44% actively engaging with members in order to ensure appropriate contribution rates and investment strategy, the other 56% using decision architecture and default options.

The paper can be found here