Pensions World

Too many DB schemes are floundering without a deregulatory lifeboat while DC investors fear to venture into the waves says editor Stephanie Hawthorne

I shall begin with the good news: in my April editorial when the FTSE 100 was languishing at around 3,500, I agreed with Steve Rumbles, head of UK defined contribution (DC) at BlackRock. He said: “Fortune favours the brave especially in the long term. Despite market turbulence, now is the time for DC pension investors to steel themselves to maintain and if at all possible increase pension contributions.”

Since then, the UK stock market has risen by around 40%. How the market will pan out over the next two to three years is more problematical.

The trouble is very few DC investors will have taken advantage of these stock market movements, either by investing more or reviewing their funds. Furthermore, UK households put an average of just £20.20 a week into life insurance and pension contributions in 2007. This is only a fifth of the amount needed to fund a simple but comfortable retirement.

Gathering dust

Nearly a third (30%) of Britain’s 8.8m active occupational pension scheme members pay no attention to how their retirement savings are invested and 29% – more than 2.5m scheme members – have never reviewed how their chosen pension fund is performing, according to research from Prudential.

The pension provider’s study also shows that 48% of workers aged 25 plus have their money invested in the default fund of their company pension scheme.

Clearly, workers who do not regularly review the progress of their pension fund to deliver asset growth or simply select the default fund offered by their employer without studying any other options available to them or seeking advice could then risk limiting the value of their pension pot at retirement.

Andy Brown, director of investment funds at Prudential, says: “You routinely check your savings, utilities, insurance cover, mobile phone contract and broadband arrangements to make sure you’re getting the best from them, and checking the performance of your pension should be no different.”

In practice, everyone knows that it is no good leaving the pension plan languishing in the bottom drawer until retirement, but few have the skills or the confidence to manage their pension. Will this ever change? And the problem will become even more acute with the arrival of Personal Accounts in 2012.

Call for legislation

These sentiments are backed up by a recent survey from the Association of Consulting Actuaries. It found that 76% of employers felt their employees were uncomfortable in taking on the investment, inflation and longevity risks inherent with DC schemes. An even higher percentage, 81%, felt employees were not capable of determining how they should manage DC savings.

Reflecting this concern, 77% of employers said that present legislation did not allow them to easily share investment, inflation and longevity risks with employees. A similar number (76%) said public policy should be more supportive of “middle way” pension designs – designs that would free up the way employers offer pensions to employees. “Middle way” designs would enable employers to hold down pension costs by, for example, holding back or removing compulsory indexation of benefits, while continuing to provide the greater stability and certainly of benefits that accrue under defined benefit (DB) arrangements.

Of course, DB schemes have been burdened by longevity and the rise and rise of the centenarian pensioner, not to mention extreme volatility. Indeed pension schemes have been on a roller coaster ride, with the aggregate deficit changing by £20bn or more in 13 out of the last 16 months.

These have been important factors in the decline of DB, but over-regulation has played its part – the National Association of Pensions Funds and the Confederation of British Industry have long been calling for more deregulation. Is it not time to listen to them before the remaining 2.7m people still accruing their benefits in DB schemes are forced to join the ranks of DC contributors?

stephanie.hawthorne@lexisnexis.co.uk