Maximizing Advantages in the Shift to Defined Contribution Pensions

Datamonitor, April 2010, Pages: 25

Introduction

This report supplies a comprehensive analysis of the effectiveness of DC pension plans and NESTs under the UK government's pension reforms. The report provides a focus on how providers and the pensions industry as a whole can boost pension savings, and how providers can fully maximize the advantages of DC schemes for consumers.

Scope

-Examines the current shape of the occupational pension plans and explores the risk distribution of defined benefit and defined contribution schemes.

-Comprehensive analysis of key regulatory trends affecting the occupational pensions market in 2010.

-Assesses strategies to combat barriers to save for pension provision and to reach key groups of non-savers.

Highlights

The current dominance of defined contribution pensions over defined benefit plans will be further cemented by the government’s plans to reform pensions with the introduction of National Employment Savings Trust in the workplace in 2012. Despite their dominance, there is growing concern about people living with low levels of income in retirement.

A great deal of uncertainty surrounds the future of the occupational pensions market and much of its progression will also depend on the effects of the government's plans for NESTs in potentially drawing investors away from private pension products.

Reasons to Purchase

-Provides detailed analysis of developments in the occupational pensions market such as National Employment Savings Trusts (NESTs).

-Access The strategies to engage individuals in retirement planning and combat their barriers to save.

-Identify changes taking place in the regulatory dynamics of the occupational pensions market.

Overview
Catalyst
Summary
EXECUTIVE SUMMARY

Table of figures
Table of tables
MAXIMIZING THE ADVANTAGES OF DC PLANS FOR CONSUMERS
An introduction
The UK private pension system consists of occupational and personal pensions
DC schemes are more of an option then ever before, as DB schemes are increasingly closed to new members
The shift toward DC or DC-type schemes is a result of supply and demand factors
Changes in regulation are also causing the shift toward DC plans
The shift toward DC has also changed the role of intermediaries
Providers need to help individuals understand the risks they will shoulder in planning for retirement with DC schemes
With DC pension plans, individuals now shoulder key risks
In DC plans, individuals must bear investment risk
In a DC plan, individuals are also exposed to longevity risk
DB plans expose individuals to risks such as wage path risk and job tenure risk
However, DC plans still have a number of advantages over DB schemes
Providers must facilitate individual choice and decision-making with DC schemes, placing more responsibility for retirement planning on individuals
However, all those involved in the pensions industry must ensure that there is no overall reduction in pension contributions
The introduction of NESTs will cement DC schemes in the workplace, but is unlikely to hit the mark
Automatic enrollment under the Pensions Act 2008 hopes to reform workplace pension provision
Automatic enrollment is seen as a way of overcoming people's apathy toward pensions
However, the investment strategy must focus on achieving good retirement income for members
The default fund must reflect the characteristics of members in NESTs
NEST members' retirement income should be at the forefront of trustees' minds when choosing an investment objective
Providers must seize opportunities to educate consumers on preparing for a post-NEST era
Providers and advisors should help people to exercise personal responsibility
Providers and key industry players must help people to separate the concepts of building up a pension fund and receiving pension income
APPENDIX
Definitions
Defined benefit scheme
Defined contribution scheme
Single premium policy
Regular premium
Wrap accounts
Further reading
Ask the analyst
Datamonitor consulting
Disclaimer
List of Tables
Table 1: The number of active members of both open and closed occupational pension schemes segmented by sector, funding approach and benefit structure, £m, 2007
Table 2: The number of active members in open occupational pension schemes segmented by sector, funding approach and benefit structure, £m, 2007
List of Figures
Figure 1: DC pension plans place more risk on the individual than on employers
Figure 2: DC plans dominate the current private pension system in the UK
Figure 3: From 2000 onwards, open DC schemes have accounted for around 48% of private sector occupation pension schemes
Figure 4: In 2007, active members of occupational pension schemes in the UK were mostly DB schemes
Figure 5: In open schemes, the option of joining a private sector DB pension plan is lower than for DC plans
Figure 6: The risk distribution is more uneven between employers and employees in DC plans than in DB plans
Figure 7: The future pensions market will be one that helps individuals to exercise personal responsibility

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