Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
As the UK DC marketplace continues to grow, we are increasingly drawn to the challenges that members face as they save for retirement. The global pandemic has created significant challenges for all of us and for many savers has made saving into their pension a luxury they can ill afford (source BlackRock DC Pulse 2021). This, however, has not affected people’s aspirations for retirement income. We have consistently seen a minimum income replacement goal of around two thirds salary over the last 5 years. Whilst achievable, this objective will be a stretch for most, requiring significant personal and employer contributions, combined with positive asset returns for extended periods of time. In reality, We fear many will find they need to work longer or retire poorer without a significant change in approach. It’s something policy makers, sponsors, advisors, trustees and asset managers need to work together on to resolve because the answer is not going to be found in 8% contribution levels and simplistic index investments.
For many members invested in DC schemes through their workplace, having the liability lay on them rather than the employer, can be a cause of uncertainty. Recent analysis from Scottish Widows showed that two thirds of people do not feel adequately prepared for retirement and are worried about running out of money. (1) This data is very similar to our own, as highlighted in our recent DC Pulse survey. One way that members can help feel reassured when preparing for retirement is by maximising monthly contribution levels. By emphasising their pensions contributions, especially in early career stages where it will be invested into predominately equity allocations, members can capture the long-term growth prospects of equities and give themselves a real chance at building a decent retirement pot. There are several pieces of research, including the PLSA and TISA, which underline how important the savings process is and how the mandated 12% contribution (2) through auto-enrolment should not be seen as the minimum level needed to deliver a comfortable spending profile.
- Scottish Widows, June 2021
- PLSA, 2021
Increasing contribution rates is just one of the many solutions that exists, although, encouraging members to do this is far easier said than done. One of the rolling challenges we face, is that many individuals believe that employers are still responsible for providing the certainty that previously came with a defined benefit pension.
As a result, the engagement and understanding levels are still shocking - with 85% of the members we surveyed unaware of the levels of risk in their portfolios, and only 1 in 20 aware of how their pension was invested3. Whilst there is some understanding that the liability sits with them, the truth is that education and financial literacy sound like an unaffordable luxury, particularly at the moment when employment, health and home schooling are far more pressing concerns. What members really want is for someone else to sort the problem out for them, 90% of survey participants want guidance from their employer. (3) That’s why we are wholly supportive of the different initiatives to create a long term contributions escalator of automatic increases, which can get contribution levels to an appropriate level in a way that doesn’t unduly pressurise individual or corporate spending power too quickly.