There is a general view that value for money from DC schemes should be measured by member outcomes. “Did your pension do well”, is not measured by the person on the Clapham overground by “engagement” but by numbers, specifically the number of pounds available to spend in later life.
The headline from Aon’s latest DC scheme survey is that the Trustees of 2/3 of occupational DC schemes don’t know what members are likely to get, or indeed how they are likely to get their “pension” paid.
Despite this we are told that
Aon survey finds schemes are prioritising value for money and investment performance
Just how far up the ladder of abstraction do trustees have to climb to prioritise VFM and investment performance but not to know how their members are doing?
The disconnect is clear when we look at how investment performance is measured
I hope that in that “other” there is at least one scheme surveyed that measures the outcomes of individual savers in terms of their internal rates of return. DC schemes are not collective, performance is not distributed evenly to members, each member’s outcome is determined by their individual circumstances and the rate at which their pots grow should be a matter of concern whether the scheme is a master trust, own employer trust or GPP.
The job of the DC Trustee is not the same as the DB trustee. The DB trustee has one funding stakeholder, the sponsor. The sponsor is there to make up the deficit if funding does not keep up (and available to pick up the surplus if it does).
With defined contribution plans, each member is his or her own sponsor, each is funding against some invisible target which is determined by input, investment performance and ultimately by the purchase – ability of the lifestyle targeted by each saver in later life.
That two thirds of DC trustees have not even considered the purpose of the schemes they run tells me that these schemes have no business being in business. They should give up, hand over records and assets to schemes that can monitor member outcomes and do something about helping members understand what they are going to get when they stop working and rely on these schemes.
Aon make this point. There is a way to use member data to determine the likelihood of the scheme as a whole meeting its targets
The average scheme that Aon surveys does not represent the average the employer. The average employer pays the minimum AE contributions into a master trust and gets little or no feedback on what members are up to.
Paying 3% of band earnings and collecting 5% more from the member and (usually) the taxman, makes for an expected top up to the state pension roughly equivalent to the impact of SERPS. A lifetime of saving at minimum levels may make a bigger difference but current DC pots are still around £40,000 which translate at 67 into extra pensions of around £4,5000 leaving a single person on around £15,000 pa in retirement.
Of course, more sophisticated DC schemes can give people more chances to build money (and as this chart shows) , more chances to waste money
This chart is of course inapplicable to the vast majority of employers who do not offer matching contributions , who have no control of investments, charges and least of all how employees take their money in retirement. But employers who pay consultants will be very interested in this chart.
Or will they? If two thirds of employers have trustees who have no idea how their staff are doing in their pension scheme, then what is the point of paying anyone to tell them that?
Dave Brailsford’s 1% wins
There is no big win for DC savers, there is only a series of tiny wins , what Dave Brailsford called the 1% wins. Have enough 1% wins and you have better outcomes. Right now Aon have one of the best master trusts which has delivered good outcomes through sound investment, low charges and because it has clever people running it. Its members get good outcomes because it admits employers who put more than the minimum in and employees who get proper support. These are all 1% wins.
But there seems to me a part of the “retirement journey” that is rather more important than can be accounted for this way.
Right now, what happens to savers from 55 onwards is relegated to section 5 of the survey and dealt with as a “plan feature”. A “preferred” drawdown solution could be anything, there is no analysis of how it works or more pertinently whether it works. It appears to be another box-ticked.
But someone who reaches 55 has between 30 and 35 years life expectancy, as long to spend as to save. The average DB plan puts 90% of its effort into understanding how it will pay pensions, the average DC plan puts retirement into the report’s appendix.
Employers and trustees don’t know what we’re doing and that’s because, us DC savers are waiting for instruction. We don’t want to do this tricky stuff ourselves, we want it done for us. We don’t want preferred drawdown solutions, 80% of us want a consistent income paid to us for as long as we live, we want a pension and we want to know what that pension’s likely to be.
Aon’s report ruffles feathers , but it lacks focus. Put simply, we don’t know what we’re doing and neither do those who run our pensions. Some common purpose is needed.
This report confirms what many of us know, that you cannot build a pension system on voluntary DC saving. Either you get tough like the Australians or you get smart. Right now we aren’t showing ourselves smart . We are basking in the glory of yesterday’s policy success.
As with social care, some tough choices need to be taken. The Government is not obliged to feed the maw of pension companies.
The private pensions industry needs to show itself smart enough to warrant the £50bn in tax subsidy it is getting. On this showing – it has a way to go.