There has been a “rapid decline” in the size of the U.K.’s defined benefit sector in the last decade, while ongoing take-up of defined contribution plans has been impacted by concerns over the value and variety of offerings, according to research published by the Pensions Policy Institute and Columbia Threadneedle.
The tenth edition of the “DC Future Book” report outlined developments made by the Value for Money Framework currently under consultation by the U.K. government, which intends to rank the quality of investment returns for workplace DC plans. One reason for this is to encourage investing with more of a focus on returns, rather than simply a fixation on reducing cost.
Speaking at a webinar coinciding with the publication of the report, former U.K. Pensions Minister Steve Webb, now a partner at consultancy LCP, cast a critical eye on the VFM framework: “If taking investment risk means some years you do really badly and you end up at the bottom of the rankings table on a one-off, it’s going to encourage risk aversion and lead to a clustering around the middle.
“What we need is a whole series of gradations, so that plans who are pretty decent value for money are striving to be as good as the best. But at the moment, that's not proposed. We're just going to end up with a dirty, great lump of plans rated 'green,' as is occurring with the Australian equivalent.”
The DC research also showed how Investment strategies have also changed in the sector over the last 10 years, with greater integration of ESG risk factors, switching more to a focus on environmental factors than governance in the last year, and more recently a focus on private markets.
Andrew Brown, institutional business director at Columbia Threadneedle Investments, said in the webinar: “I think DC plans need to diversify. They need to invest in several uncorrelated asset classes to smooth the investment journey. Over time, DB plans have been quite well served by real assets such as private equity and real estate, although this is up until the point at which they wanted to go to buyout and were maybe finding difficulty in unwinding some of these kind of physical assets.”
The U.K. government has a also proposed a Pensions Dashboard to be created to allow workplace savers to readily access a breakdown of their pension pots through accessing an online portal. However, its introduction is facing a protracted timeline, with Shantel Okello, a policy researcher at the Pensions Policy Institute, estimating its full rollout to not be completed until 2030.
“Before full rollout there will be a lot of user testing," Webb said. "Yet I get the feeling that there is no momentum behind this. So if I was guessing, I'd say it will be a couple of years time (before user testing begins).”
