DC pension provision in the UK, would you pass the pension marshmallow test?

The Budget announcement scrapping the lifetime allowance benefits those with larger pension pots and those who understand the importance of why, how and where to invest their DC pots. But what about those that aren’t as well informed?

When I joined PwC in 1992 I was one of the first not to be eligible to join our DB pension scheme. Even at the time, with my limited knowledge of pensions, I knew this was unlikely to be as good a deal. Under the guidance of one of my more knowledgeable friends I signed up for the DC scheme, ticked the investment strategy boxes, and left it alone. Thirty years on I think the same boxes are ticked.

The last 20 years of my career have been focused on helping DB schemes become properly funded, to protect the level of benefits for members and to ensure they get their full pension entitlement.?

In many of the pension schemes I work with I see some of the very best and brightest minds in the UK painstakingly deliberate over a DB scheme’s investment strategy - which asset managers to use, how much hedging to put in place, how much risk can be taken.

There is a certain irony therefore when I think about how little time I’ve spent thinking about my own DC pension.?

Is anyone looking out for your DC pot?

It’s maybe a bit punchy to describe a DC scheme as being the ‘poor relation’ for most employers. But it’s certainly true that the average member isn’t getting the benefit of those same experts when it comes to choosing how to invest their own DC pension pot.? Unfortunately I think many companies are of the view that this is up to the, largely inexperienced, employee.?

So what is it like as an employee making choices? Largely how you feel about risk is what sets your strategy. Those open to high risk are steered towards equities, medium to bonds, low to gilts. But, given movements in gilt values over the last year or so, is this really the low risk option?

Of course it is not just where, but how much to save.? When I talk to my colleagues of various ages, they almost all have example stories of how their friends and family members don’t actually save a sensible level into their DC pension scheme, stating that “my house and/or my ISAs are my pension”, and neglecting to think about the importance of savings or the tax benefits that a pension can bring.?

Unfortunately I think the average member of the UK workforce is poorly informed when it comes to managing their DC pension scheme.

Would you pass the marshmallow test?

There’s a famous experiment where a small child is given the choice of one marshmallow now, or two if they are prepared to wait.? I don’t think you need to have the four children that I have to guess what the majority of participants do in that scenario.

Let’s translate that to grown-ups - how many of us would pass the pension test of a pound now or two pounds later in retirement? Unfortunately I’m not sure enough of us are saving sensibly for retirement (which might be several decades away) and especially not without significantly more information about the issue.

There’s another fable about the person who retires and asks about the size of their pension. “￡20,000, not bad!” “No, that’s the total pot”.? I wonder how many people out there might have a similar reality check in the future. For these people, scrapping the ￡1m cap is not the issue.

What does that mean for the future??

I turn 53 this year - my retirement is still a decade away, and my peers and I will be among the first without a DB scheme to support us.? We’re about to have a generation who cannot retire on a meaningful income for themselves or their families, and certainly can’t contribute to society in the same way that my mother has on my late father’s government pension, or my grandmother did (until the age of 99) on my grandfather’s pension.

So what to do about it??

For me there are two clear options: firstly, we could reopen DB schemes with a much lower rate of accrual so they are both affordable and provide a reasonable level of benefits for those who participate. Unfortunately, I think many employers are both fearful and at the same time not incentivised to go down that route.?

Or as a viable alternative, we help educate people to put more in their DC scheme and critically we help them to make more educated pension choices once the money is in there. We explain to employers that they should help and support their employees as they make these choices and incentivise them so that it should be a priority.?

In short, even if UK companies are not prepared to put the same amount of money into pension schemes as was done historically, we should be prepared to put the same amount of effort in as we do with the closed legacy DB schemes in the UK.

Personally I have not given up on the hope of modified DB schemes gaining traction, but in the meantime I am keen we address the shortcoming with DC. What do you think? I would love to hear from you.