One of the Minister for Pensions personal desiderata is to narrow the gap between DB and DC savers.
The graph, taken from the DWP’s recent Analysis of Future Pension Income.shows DC savers increasing while those with DB rights are in decline.
Of course DB is only in decline in the private sector where there’s very little pension accrual going on any more.
The DWP reckon DC savers are going to be the fastest growing group of workers achieving a decent retirement income as the years to 2060 go by. They are of course private sector savers.
But fair is fair, DB savers get a hefty subsidy from employers , typically working out at 20% + of salary , while their DC counterparts will struggle to get beyond the basic auto-enrolment minima – 4% of a band of earnings that for low earners is anything but basic earnings.
Just what is fair about the gap between the two levels of contributions may be what is troubling Laura Trott. As many employers negotiate with insurers to buy-out their guaranteed pension liabilities, little is being said about where any surplus should go. For some hybrid schemes the surplus could be distributed to DC savers but realistically, the best that most DC savers can expect is a higher contribution from the boss as deficit contributions become a thing of the past.
It may be that somewhere deep within the DWP’s model is an assumption that DC contributions will increase, the announcement on Friday that the DWP was preparing to require auto-enrolled contributions to be paid from £1 and to include the 18-22 cohort in auto-enrolment – goes some way, but we’d have to see some kind or ratchet on the band contributions to level DC savers up towards DB levels.
But that’s only the half of it. Let’s look at all the perks that DB savers get that DC savers don’t
- Paid for administration
- Paid for investments
- Paid for pensions
- Guarantees that the money promised will be paid as long as you (and usually spouse) are around
- Indexed benefits and indexed pensions.
Meanwhile DC savers have to bear all the costs of their pensions out of their pots . These include
- The cost of administration and investments
- The cost of an annuity or a drawdown policy
- Guarantees not included
- Buy your own indexation
- Little recourse if anything goes wrong.
I should be a little careful on that final point but I see so little regulation of administration (TPR has now powers, the FCA little interest) that I fear many DC savers get served up a pot they have no way of checking and which may well be very wrong.
But worst of all, DC savers is now required to engage in managing their own pension with very little help to do it – unless you are prepared to pay for private pension management from an adviser.
The only people who seem to prefer a DC pension to a DB pension are the clients of advisers who have recommended and executed a transfer. Here the incentive was the barmy transfer value , calculated using the pretty-well non-existent gilt rate. Since the rise in gilt rates in 2022,
But they now face decades of uncertainty while those who stayed in the DB scheme have the predictability of an indexed wage in retirement that lasts as long as they do.
I’m with Laura for fairer pensions, though how you level DC pensions up is unclear. I hope we don’t try to dumb DB pensions down, but heh– the Minister for Pensions is enjoying a Defined Benefit accrual while she figures things out.