Pensions World

DC is flawed and needs a radical overhaul if the 2012 pension reforms are to succeed, says editor Stephanie Hawthorne

The number of people paying into an occupational pension has fallen to its lowest level since 1956. Indeed, only 3m people were saving into a private sector occupational pension scheme in 2010 according to latest Office for National Statistics (ONS) research. Yet 40 years ago when Pensions World was launched, Britain’s pensions were the envy of the world. Now we are merely just above average in the Mercer Global Index.

This is largely because of the closure of most defined benefit (DB) schemes and their replacement by unproven or at worse defective and unloved defined contribution (DC) alternatives. When I began work, senior employees urged me to join the trusted final salary scheme. Sadly, that has rarely been true with DC. I have never heard an employee at work enthuse over DC. Unless consumers believe in the product and encourage their friends, relatives and colleagues to join, the UK savings rate will remain low. I dread using a taxi and revealing that I am editor of Pensions World as almost certainly I will hear a long diatribe against pension providers and how the driver’s pension is not worth the paper it is written on. And, of course, they have ceased all contributions. The faltering economy and yo-yoing stock market must all take some of the blame, but DC needs fundamental reform.

The forerunners to DC were self-employed pensions taken out by high earning barristers and accountants who were happy to take the risks inherent in such plans because pensions were rarely their only form of savings and the generous tax relief cushioned any stock market underperformance. Tomorrow’s DC savers will include cleaners, nannies and security guards, none of whom can afford to take risks. No one, even with target dating, has satisfactorily come up with a solution to match the certain outcome of most DB schemes.

The main problem with DC, apart from the employees bearing all the risk of underperformance, is that both employers and employees are not contributing enough. Latest ONS research shows that for private sector DB schemes, the average contribution rate in 2010 was 5.1% for employees and 15.8% for employers. For private sector DC schemes, the average contribution rate in 2010 was 2.7% and 6.2% respectively.

Plea for radical rethink

There are other issues. Members’ interests are not fully represented even though it is they who take all the risks. The UK’s DC structures are inefficient. As Mark Hyde Harrison, chairman of the National Association of Pension Funds, said at its annual conference: “Can it really be right that we have 42,000 occupational DC schemes in the UK? And is it right that the average contract based scheme has just 20 members? Of course not. The sub scale nature of DC creates other inefficiencies – high costs, poor admin, weak governance or none at all. And it creates sub-optimal investment frameworks. The information disclosed on costs and charges is far too opaque – people simply do not know how much they are being charged and what for. Not only are there too many schemes, there are too many pension ‘pots’ and people find it difficult to aggregate them because the process is opaque and costly.”

I wholeheartedly endorse Mr Hyde Harrison’s remarks that “What we need is a radical rethink of the way we ‘do’ DC in the UK. We need to move to a world of large, efficient, well run, low cost DC pension vehicles run in the interests of members.”

With so many people set to be auto-enrolled from next year, it is imperative that we reform DC, otherwise cynicism will remain the currency of pensions and poverty the result.