According to the PPI, at a time when the cost of living is increasing more quickly than pensioners’ income, particularly in relation to housing and energy costs, preserving the real value of DC pension pots has come into renewed focus. The triple lock currently in place provides pensioners with partial protection against inflation.
As The DC Future Book 2022 details, more people than ever before are now enrolled in workplace pension schemes, driven by the introduction of automatic enrolment in the UK. Whilst in 2012 only 46.5% of employees participated in a workplace pension of any kind, by 2021 this figure had grown to 79.4%, thanks to auto enrolment being fully implemented. As a result, DC pension membership has hit successive highs at 13.8 million active members, many of whom have been automatically enrolled.
The use of DC schemes by employers has greatly increased too, with 90% of active pension scheme members now in DC schemes, compared to 3.1% in Defined Benefit (DB) schemes. This shift currently presents a unique set of challenges, most pertinently the tendency of DC schemes to invest in assets without appropriate protection against the current soaring levels of inflation.
Providing insight into the state of play of the UK DC pension market every year, the new data in The DC Future Book 2022 also shows that:
• There are £545 billion in aggregate assets currently invested in DC schemes, a number which is set to grow to around £1.03 trillion (median outcome) by 2042 according to the PPI’s projection.
• At circa 9 million active members, master trusts have the highest number of scheme members, the majority of whom (96%) are invested in default strategies holding the highest value of aggregate assets at £3.1billion on average.
• Fewer DC savers access their DC pots for both annuitisation and income drawdown, compared to pre-pandemic levels. At the same time, full and partial withdrawals have increased above pre-pandemic levels.
• A recurring theme remains the increased number of those at the point of retirement not seeking regulated advice before purchasing an annuity or income drawdown, at 84% and 40%, respectively.
Lauren Wilkinson, Senior Policy Researcher at the Pensions Policy Institute, said: “As the transition from DB to DC continues and we start to see more people reaching retirement with greater dependence on DC savings, it is increasingly important that we have a detailed source of longitudinal analysis by which we can monitor the implications of existing policy and provide a solid evidence base for future policy innovation in order to support better retirement outcomes. Aggregate DC assets are projected to increase to around £1.03 trillion over the next 20 years, and alongside this rapidly expanding market share comes a responsibility for DC investment decision makers to focus on protecting their members’ savings.”
Andrew Brown, Client Relationship Director at Columbia Threadneedle Investments, commented: “The last 12 months have seen extraordinary challenges. Between the ongoing effects of the Covid-19 pandemic, the war in Ukraine and additional supply chain constraints, inflation in the UK has reached its highest level in 40 years. As the PPI notes, unexpected and significant increases in inflation are likely to have far-reaching effects for people and present a considerable risk to their retirement outcomes.
“The long-term nature of DC schemes demands pragmatism when altering investment strategies. However, governance bodies should be encouraged to consider inflation protection within members’ default funds. Less liquid real assets such as property and infrastructure can form part of a portfolio to manage this risk but are currently underutilised within DC investment strategies.
“An understanding of the assets classes in which schemes are invested and their differentiated responses to high levels of inflation has become particularly pertinent. The latest edition of The DC Future Book is a great source of information to help in this endeavour. We encourage the pensions industry and policy makers to continue to consider advances that provide future retirees with greater financial security.”
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