According to the Pensions Policy Institute (PPI), the author of “The Future Book: unravelling workplace pensions”, employees and employers may have to contribute between 11% and 14% of the employee’s salary[1] to a workplace DC scheme and start saving at the age of 22 to have a two in three chance of generating an adequate income in retirement.
The research shows that as DC schemes become the prevalent form of pension savings in the UK, there could be around 14 million people contributing to a DC scheme by 2030 (up from 11 million today), while the median DC pot could grow from £14,100 today to £56,000 in 20 years’ time due to a longer period over which they can benefit from saving. In aggregate the value of UK DC assets by 2030 is projected to grow to £554 billion (in 2015 earnings terms), a considerably lower figure than current industry consensus at £1.7 trillion (in nominal terms).
The research also found that the majority of savers invest in the DC scheme default fund, possibly due to the complexity of the investment choices available and a lack of advice.
Campbell Fleming, CEO, EMEA at Columbia Threadneedle Investments said: “As a global asset manager our role is to invest our customers’ hard-earned pension savings to ensure they achieve the best possible financial outcome to and through retirement. We partnered with the PPI to encourage a better understanding of UK workplace savings, so that investors, policy makers and the pensions community can make better decisions.
“In our view the emphasis is on both employers and employees to consider increasing joint contribution levels. But it is also up to us asset managers and investment solution providers to work with savers, policy makers and trustees to make investment choices simpler and more intuitive in order to encourage engagement with pensions early on. More people than ever are responsible for their own retirement provision and as such are at the risk of making the wrong decisions in the face of complex investment choices and market / longevity risks that are hard to quantify.
“The default fund option in a pension scheme is not necessarily the best choice for investors. Default funds are often heavily skewed towards equities and therefore carry a higher risk, which may be appropriate in the early stages of savings but not when investors are closer to retirement. We have worked hard to understand people’s desired pre- and post-retirement outcomes and build funds to answer these challenges. We believe pension portfolios should have a dynamic asset allocation framework, where portfolio managers chose investment assets from the ground up and target real returns (instead of a market benchmark) with lower levels of volatility than equities.
“Ultimately, if good financial outcomes are to be achieved to and through retirement, we need to help people achieve the required asset growth in the run-up to retirement, and provide the necessary downside protection, inflation-linked returns and sustainable income stream during retirement.”
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