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IPE special report May 2018

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UK should consider managed DC pension schemes – Lord Hutton

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  • UK should consider managed DC pension schemes – Lord Hutton

UK - The UK pension industry must consider the possibility of changes to its defined contribution (DC) system and should consider the introduction of managed DC schemes - guaranteeing members a minimum retirement income - Lord Hutton has urged.

The call comes as the National Association of Pension Funds (NAPF) warned that as many as 3m employees would opt out of auto-enrolling into a pension scheme next year, with nearly half citing affordability of contributions as a concern.

Lord Hutton, who chaired the Independent Public Service Pensions Commission earlier this year and is a former Work and Pensions minister, told attendees at the NAPF annual conference in Manchester yesterday that pensions were seen as an emotive rather than an economic issue by many consumers and urged resistance to the existing public narrative that DC schemes were lesser savings vehicles.

However, he conceded that DC funds on average offered lower returns compared with their defined benefit counterparts, and that this was often down to the inexperience of individual members investing.

He said there was therefore much to be learned from how other jurisdictions had implemented DC.

He also attacked DC funds' charges, saying the new National Employment Savings Trust (NEST) was proof that a fund could keep costs low.

"If NEST really can succeed in keeping charges low, why can't the private sector follow suit?" he asked. "This is going to be a major challenge to the industry in the years ahead."

He praised the Pensions Regulator for launching a consultation on the issue, saying that guaranteeing better returns for those in the DC sector would be a "very important" issue going forward.

"I hope the DC product and brand will continue to evolve and that we see innovation," he said, outlining the three challenges for the industry of guaranteeing an income satisfactory to the member, proofing it against inflation and accumulating funds that would last a member's lifetime.

"To meet that challenge, we initially need to embrace change and fresh thinking," he insisted.

"I am particularly interested in a managed DC concept, where, staying very strictly under the DC umbrella, schemes begin to offer some aspects of what in the past we had previously associated with a DB product."

He was also critical of the use of target-dated funds, saying he was "not convinced" this was the right approach to pursue.

"It might be a good way to manage volatility, but there is no emphasis here on trying to achieve a given level of retirement income, something more and more people are going to be attracted to," he said.

Meanwhile, the NAPF has warned that as many as 3m employees would opt out of pension funds on being auto-enrolled from next year, an increase on previous government estimates.

Based on a survey conducted by Populus, the organisation said one in three employees would opt out of their company pension fund, with 48% saying that cost was a concern.

The NAPF's chief executive Joanne Segars admitted that employees' wariness of pensions posed a "big threat" to auto-enrolment.

Echoing Lord Hutton's concerns about fees, she said: "There's no point in bringing people into a pension if their savings are going to be eaten away by fees and charges they can't understand. They'll simply walk away.

"The pensions industry has to be much more upfront about what it is doing. People need information about their pension in a form they understand. That means pounds and pence, not basis points and unit prices."

The organisation's survey found that 27% of respondents would opt out, although this increased to 32% if those who did not reveal their intentions were included in the group of people opting out.

However, of those willing to stay auto-enrolled, nearly half considered it a good deal, although one in five admitted they would have to reduce debt payments to remain in their scheme.

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