DC Today will record at bi-monthly intervals how DC schemes and their members are reacting to economic pressures. The first edition represents responses from 132 DC pension schemes in the UK.
The results reveal significant shifts in members’ behaviour as they respond to current challenges and recent market volatility. Over the last three months, one in five DC pension schemes reported an increase in requests to reduce contributions or to opt out of pension saving.
Steven Leigh, associate partner at Aon, said: “Recent economic challenges, including high inflation and the impact on the cost of living, have had a considerable impact on people’s finances. It is concerning, but perhaps not surprising, that one in five DC pension schemes report an increase in members reducing or ceasing their pension contributions. While this action may help individuals alleviate short-term pressures, it risks leading to a significant reduction in their retirement income.
“Findings from the Aon UK DC Pension Tracker recently showed that opting out of pension saving for just three years - until automatically re-enrolled - could lead to a significant reduction in retirement income. In order to make up this shortfall, savers would have to pay increased contributions each and every year until retirement. Therefore, it’s vital that the implications of opting out of workplace pension saving are fully communicated and understood before people take this step.”
Steven Leigh continued: “The survey also found that in the same three-month period, one in six DC schemes had observed an increase in requests for early access to pension savings. It’s not just the savings part of the ‘pensions journey’ where cost of living challenges may have an impact. There is a real risk that drawing on pension savings early could result in many employees not being able to afford to retire at the time they had originally planned.
“Findings have also indicated that 43 per cent of schemes have seen a rise in stated concerns or requests for information about investment performance. This has undoubtedly come as economic conditions and market volatility resulted in lower, and in some cases negative, returns on members’ retirement savings. Those with longer to retirement may be better placed to withstand market volatility but those closer to retirement might face more challenges, particularly if they are taking their pension savings as a cash lump sum.”
The survey also found evidence of a significant proportion of schemes looking for ways to respond to these changes and to support members.
Steven Leigh, said: “While we see some concerning trends, it is encouraging to see schemes’ efforts to support members in making better decisions in this challenging environment. The DC Today survey found that 26 percent of DC pension schemes either have or are considering allowing additional flexibility for members around contributions. This could be very welcome if people are struggling financially and can ultimately serve to reduce the impact on members’ retirement income. However, it is essential that very simple or automated processes are put in place to get contributions back up to appropriate levels following any period of reduced inputs.
“It is also encouraging to see that almost half (47 per cent) of DC schemes have issued additional communications to members and with many more considering doing so. It is important that in times of uncertainty, members can be confident that trustees and sponsors are monitoring the situation, taking action where necessary and communicating the support options available to members.”
Other key findings include:
• 20 per cent of schemes have provided additional retirement support – and a further 23 per cent are considering doing so. The types of support offered to members include access to a preferred independent financial adviser, enhanced member communications or signposting to a drawdown provider for flexible retirement income.
• One in 10 schemes are making changes to investment design, with a further three in 10 considering this option. Recent volatility is highlighting a belief in the need for diversification away from traditional equity/bond portfolios in the approach to retirement.
• 32 percent of schemes have considered the impact of recent market volatility or higher inflation on member outcomes. Due to increased inflation, the Pension and Lifetime Savings Association has recently revised its Retirement Living Standards. Schemes that had carried out analysis in relation to the previous standards may now find that projected member outcomes vary significantly. This reiterates the importance of considering on a regular basis how well the pension scheme is delivering for members.
The DC Today survey is available here:
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