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Retirement Plans

Higher retirement plan contributions needed, conference speakers say

Plan executives and regulators must engage more with participants to encourage increased employee contributions to retirement savings plans, panelists said at an industry conference in Manchester, England.

Speakers at the Pensions and Lifetime Savings Association annual conference this month warned the current levels of contributions — from both employers and employees — in the U.K. are not sufficient to provide necessary retirement income, let alone a desired one, despite planned increases in the next two years.

Currently, the combined employer and employee contribution rates equal 2% of an employee's salary. Starting next April, that mandatory rate will increase to 5% (with 3% coming from the employee) and reach 8% (with 5% from the employee) in April 2019.

Plan executives called on peers to boost engagement efforts to stimulate better retirement outcomes through improved communication with participants about contributing more than the national rate. Some defined contribution plan executives also called for reconsidering DC investment options to reflect better value for money, noting that low-cost passive investments might not be the best value when returns are low.

Nico Aspinall, chief investment officer at the 2 billion ($2.7 billion) The People's Pension, a multiemployer plan in West Sussex, England, said during a panel discussion on how high quality and value-for-money solutions can be delivered to participants: "We absolutely have to up the contributions and auto-escalate but it's got to be a mixture (of actions and) not" a mandatory increased participant contribution.

Richard Butcher, the new PLSA chairman, said during a different presentation, that the total contribution should increase to 12%, while the scope of automatic enrollment needs to be deepened to include additional groups under the national system, such as the self-employed.

Other speakers agreed the planned escalation of contributions on its own is not enough to get plan participants to save enough for retirement. In some cases participants will not have enough income to contribute more, speakers argued, and said new forms of savings and investments should be considered.

Other plan executives said that incorporating active elements into mostly passive allocations could help maximize returns for participants.

Paul Todd, investment development and delivery director at the 1.8 billion ($2.4 billion) National Employment Savings Trust, London, said that to maximize investment returns for DC participants, "a one-year investment (horizon) is not a good set of data. It comes down to your own investment philosophy and how do you believe financial markets work long-term."

"And for NEST, diversification at a low cost has become incredibly complicated so we have introduced a number of active elements into our portfolio — such as an active corporate bonds fund and a hybrid property fund. At the moment, we are also looking at options to add infrastructure to the portfolio," he said.

"We have added these building blocks to provide the best value for money," Mr. Todd said. "It is important (for plans) to set an investment budget and understand the cost of individual asset classes," he added.

Mr. Todd said that high performance fees remain a challenge for plans in the DC world. "We don't pay them and so getting into hedge funds, for example, is particularly challenging."