With UK defined contribution (DC) assets expected to reach £829 billion by 2022, many plan sponsors are reassessing how best to position scheme design to deliver more successful retirement outcomes. In a new paper, DC on target, Simon Chinnery, Head of UK Defined Contribution at J.P. Morgan Asset Management, looks at three key considerations that influence whether DC scheme members will be able to achieve their retirement income needs.
Chinnery said: "Increasing scheme success requires sponsors first to determine how they measure success. We believe the most appropriate goal is to strive to maximise the number of members who reach at least a minimum level of income replacement at the point of retirement. Taking that into account, a scheme's success rate largely hinges on the interaction of three critical components that ultimately remain under member control: how much the member saves, how the funds are invested and when and how assets are withdrawn. Companies, however, have a very real ability to place a greater number of members on a prudent DC path by influencing constructive behaviours through strategic scheme construction. To accomplish this successfully, they must first develop a clear vision of what they want that path to be and where it should lead, asking themselves: ‘What do we, as a company, hope to achieve for members with a DC offering?'"
The paper covers three key points that affect retirement replacement income:
1. Saving: Securing more retirement income starts with saving more. Current contribution rates appear much too low.
2. Investing: JPMAM believes that target date funds represent a significant advancement in bringing the professionally managed diversification and risk-efficiency benefits of institutional portfolios to individual scheme members.
3. Spending: Today, most scheme withdrawals are used to purchase an annuity before or at retirement but this trend may change given new legislation, product innovation and an increasing need for phased retirement.
Chinnery concluded: "By defining the goal for a DC plan and determining what constitutes success for that plan, sponsors can reduce (and potentially remove) some of the uncertainty that can often surround the DC framework and help members achieve a more secure retirement."
Copies of the DC on target paper are available on request by contacting:
J.P. Morgan Asset Management
Sarah Godfrey
Telephone: +44 (0) 20 7742 5950
Email: sarah.l.godfrey@jpmorgan.com
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