The past few years within the DC pensions market have been remarkable both in terms of the frequency of change and the scale of reform that has been thrust upon the industry. Arguably there has been more on the DC pension’s agenda since 2012 than there was in the prior 100 years.
Undoubtedly Automatic Enrolment (AE) has been the game changer, with UK employers (including Theo Paphitis and Karren Brady) all facing the same challenge of having to auto-enrol their eligible workers into a qualifying workplace pension scheme.
Add into the melting pot the issues of pension reform (whether it be charge caps, the banning of commissions and the introduction compulsory DC governance) and the evolution of retirement freedoms, and you can see there has been a huge amount going on. Who said pensions were boring?
These new challenges, added to the historic issue of getting employees to engage with their pension in the first place, have meant that propositions have had to adapt, and adapt quickly. Time will tell if AE can succeed where its ugly sibling the Stakeholder pension failed so miserably, but one thing is for sure, the change agenda continues to grow as does the pressure on employers.
As with any period of great change there have been winners and losers. At provider and adviser level, we have seen the successes of those who have readied themselves for these changes, while we have seen others fall by the wayside as the pressure and volume of change has become too great.
As predicted we have seen a contraction in the DC provider market since 2012 most noticeably with the recent acquisition of Friends Life by Aviva and with the exit of niche providers such as Skandia (Old Mutual) and HSBC in the run up to AE.
Providers have faced a great deal of pressure most noticeably:
- ‘Capacity Crunch’, with AE adding intense pressure on provider administration. The shortcomings of some providers (mentioning no names) has been shown up by a select few who have won the day by throwing sufficient resource at AE from the outset.
- Commercial pressures through Solvency II requirements (for higher capital reserves) and the financial impact of the charge cap reducing their margins.
- The pressure of developing and delivering pension freedom propositions to the market in time for April 2015.
- Increased governance requirements from April 2015 with the introduction of independent governance committees (IGC’s) for all contract based schemes.
- The stagnation of DC new business for providers in light of the banning of adviser commissions, auto-enrolment and employers reluctance to do anything other than ‘get across the staging date line’ for AE.
Our view is that there will be a continued contraction of the DC provider market over the next few years with possible mergers already being mooted. We are certain that those providers who have a robust, flexible proposition linked to technology will win out and those that continue to under resource will continue to flounder.
The Pension Advisory Market
As with providers, advisers within the DC market space have experienced AE pressures over the past few years. In our experience providers of DC pensions want to work with fewer advisory firms – mainly those who are aligned in their propositions, particularly built around platform capabilities, reducing admin and overheads. If the adviser cannot offer a compelling solution, providers have more desire to go direct to the client base.
As the AE journey continues, starting with re-assessment from Q4-2015 and then the increases in minimum contributions from 2017, it will truly be a test for AE solutions – will the plasters tear off? Or will solutions demonstrate their durability? – Only time will tell.
For many advisers the banning of adviser commissions may also prove to be the final straw as the switch to a sustainable fee based model will prove too difficult for some to remain viable. Our view is that advisers with a strong proposition, using technology and focused on member outcomes will continue to dominate the DC advisory space.
The Future for DC
The DC pensions market has faced a huge amount of change recently but we are confident it will continue to grow in importance for employers. For many, DC pensions (particularly contract-based DC) are the qualifying pension scheme of choice for AE and with 5 million employees having been auto enrolled and more to come in the next couple of years, we expect DC’s prominence to rise.
In addition, we continue to see the demise of Occupational Pension Schemes (particularly DB), with employers looking to manage risk and cost, whilst future-proofing their approach. Contract-based schemes can prove value for money for employees whilst also reducing the burden on employers.
With providers pouring resources into online platforms and retirement freedoms, there will be further growth and opportunity in the DC space. The tax changes introduced in the recent budget impact so few of the UK population, that for most, a DC pension will be the mainstay of their retirement funding.
Outside of continued investment in DC pensions, our view is that they will continue to evolve, with the likes of Defined Ambition or DC schemes with guarantees will be introduced to try and mirror some of the benefits of DB schemes.
Perhaps we could see the introduction of Collective DC (CDC) schemes, similar to the Dutch model, where returns are smoothed between scheme members over time thereby reducing risk and providing value to members. This is still some way off, however, and a lack of interest may ultimately mean they remain a pipe dream.
In summary, there is a huge amount going on in the world of pensions and this is only going to pick up more speed as we continue on the change journey.
To use a tenuous analogy for AE, it is very much like the Olympic 400m hurdles with the employer being the athlete - through a staggered start the first hurdle is approaching and it remains to be seen who is going to make beyond the first ‘re-assessment’ turn towards the ‘phased contribution’ second……one thing is for sure, no-one wants to fall flat on their face in front of the expectant regulator.