The research, which looks at the funds that DC pension savers are investing in, shows that some DC workplace schemes have 99% of savers paying into a default fund. This lack of engagement with the pension process increases the risk that an investor misses out on the best fund option to suit their appetite for risk and reflect how far away from retirement they are. In addition, the fact that most DC default funds are not actively managed means that the money that workers are diligently saving could be in a fund that is unable to withstand market shocks and deliver good levels of consistent growth over the long term.
Conversely those saving into an individual personal pension are far more likely to choose where their money is invested, with private personal pension schemes reporting that as few as 6% of their savers are investing in the default fund.
If, in addition, these DC savers have not considered how much they are putting away each month, when they reach retirement they may find that the value of their pension pot is not enough to fund their desired lifestyle in retirement.
Automatic enrolment legislation states that by 2019 the amount of money that employers and workers must jointly put away should equate to at least eight per cent of each worker’s salary. But today’s savers are currently saving less than half that amount. Figures from the PPI suggest that many employees may have to revise their retirement plans. The figures show that, in order to have a two in three chance of generating an adequate income in retirement, employees and employers need to contribute between 11% and 14% of band earnings into a workplace DC scheme – over 400%[1] more than the current employee contribution level – and start saving at the age of 22.
The latest figures indicate that savers who are at the other end of the spectrum and are selecting how to access their pensions have become far more engaged since the advent of the freedom and choice reforms. Since April 2015 few people approaching retirement have purchased an annuity which was the “default” retirement income solution and there has been a growing demand for alternatives such as income drawdown.
Dominik Kremer, Head of Institutional Sales, EMEA at Columbia Threadneedle Investments said: “With people living longer, the pension pots of those approaching retirement now have to be large enough to fund a lengthy retirement and our research indicates that savers relying on a defined contribution pension face an income shortfall. As this group now makes up the majority of the workforce, the number of people who could be affected is considerable.
“Auto enrolment has increased the number of employees who are saving for retirement and we will continue to see more employees contributing to these schemes, however in order for them to truly reap the benefits it is important that the amount they are putting away and the fund they in invest align with their retirement needs. Our research shows that many employees are adopting the ostrich position and remain detached from the saving part of the retirement planning process. This means that they are not able to maximise the potential of their investment and risk sleepwalking into a pension income black hole.
“In our view the onus is on both employers and employees to consider increasing joint contribution levels. However, deciding to save for retirement is just one piece of the puzzle. It is also crucial that the savings are invested in an appropriate fund that meets the needs of a modern retiree. Typically the funds that employees’ are automatically invested in carry a higher risk which may not be suitable for those approaching retirement. We believe pension funds should have a dynamic asset allocation framework, where portfolio managers choose investment assets from the ground up and target real returns (instead of a market benchmark) with lower levels of volatility.”
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