Maximizing Advantages in the Shift to Defined Contribution Pensions

Introduction

This report supplies a comprehensive analysis of the effectiveness of DC pension plans and NESTs under the UK government's pension reforms. The report provides a focus on how providers and the pensions industry as a whole can boost pension savings, and how providers can fully maximize the advantages of DC schemes for consumers.

Scope

*Examines the current shape of the occupational pension plans and explores the risk distribution of defined benefit and defined contribution schemes.

*Comprehensive analysis of key regulatory trends affecting the occupational pensions market in 2010.

*Assesses strategies to combat barriers to save for pension provision and to reach key groups of non-savers.

Highlights

The current dominance of defined contribution pensions over defined benefit plans will be further cemented by the government’s plans to reform pensions with the introduction of National Employment Savings Trust in the workplace in 2012. Despite their dominance, there is growing concern about people living with low levels of income in retirement.

A great deal of uncertainty surrounds the future of the occupational pensions market and much of its progression will also depend on the effects of the government's plans for NESTs in potentially drawing investors away from private pension products.

Reasons to Purchase

*Provides detailed analysis of developments in the occupational pensions market such as National Employment Savings Trusts (NESTs).

*Access Datamonitor's strategies to engage individuals in retirement planning and combat their barriers to save.

*Identify changes taking place in the regulatory dynamics of the occupational pensions market.


Report Highlights
The current dominance of defined contribution pensions over defined benefit plans will be further cemented by the government’s plans to reform pensions with the introduction of National Employment Savings Trust in the workplace in 2012. Despite
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Overview 1
Catalyst 1
Summary 1
EXECUTIVE SUMMARY 2
Table of Contents 3
Table of figures 4
Table of tables 5
MAXIMIZING THE ADVANTAGES OF DC PLANS FOR CONSUMERS 6
An introduction 6
The UK private pension system consists of occupational and personal pensions 7
DC schemes are more of an option then ever before, as DB schemes are increasingly closed to new members 9
The shift toward DC or DC-type schemes is a result of supply and demand factors 12
Changes in regulation are also causing the shift toward DC plans 12
The shift toward DC has also changed the role of intermediaries 12
Providers need to help individuals understand the risks they will shoulder in planning for retirement with DC schemes 13
With DC pension plans, individuals now shoulder key risks 13
In DC plans, individuals must bear investment risk 14
In a DC plan, individuals are also exposed to longevity risk 14
DB plans expose individuals to risks such as wage path risk and job tenure risk 15
However, DC plans still have a number of advantages over DB schemes 16
Providers must facilitate individual choice and decision-making with DC schemes, placing more responsibility for retirement planning on individuals 17
However, all those involved in the pensions industry must ensure that there is no overall reduction in pension contributions 17
The introduction of NESTs will cement DC schemes in the workplace, but is unlikely to hit the mark 18
Automatic enrollment under the Pensions Act 2008 hopes to reform workplace pension provision 18
Automatic enrollment is seen as a way of overcoming people's apathy toward pensions 18
However, the investment strategy must focus on achieving good retirement income for members 19
The default fund must reflect the characteristics of members in NESTs 19
NEST members' retirement income should be at the forefront of trustees' minds when choosing an investment objective 20
Providers must seize opportunities to educate consumers on preparing for a post-NEST era 20
Providers and advisors should help people to exercise personal responsibility 22
Providers and key industry players must help people to separate the concepts of building up a pension fund and receiving pension income 22
APPENDIX 24
Definitions 24
Defined benefit scheme 24
Defined contribution scheme 24
Single premium policy 24
Regular premium 24
Wrap accounts 24
Further reading 25
Ask the analyst 25
Datamonitor consulting 25
Disclaimer 25
List of Tables
Table 1: The number of active members of both open and closed occupational pension schemes segmented by sector, funding approach and benefit structure, £m, 2007 11
Table 2: The number of active members in open occupational pension schemes segmented by sector, funding approach and benefit structure, £m, 2007 12
List of Figures
Figure 1: DC pension plans place more risk on the individual than on employers 6
Figure 2: DC plans dominate the current private pension system in the UK 8
Figure 3: From 2000 onwards, open DC schemes have accounted for around 48% of private sector occupation pension schemes 9
Figure 4: In 2007, active members of occupational pension schemes in the UK were mostly DB schemes 10
Figure 5: In open schemes, the option of joining a private sector DB pension plan is lower than for DC plans 11
Figure 6: The risk distribution is more uneven between employers and employees in DC plans than in DB plans 15
Figure 7: The future pensions market will be one that helps individuals to exercise personal responsibility 21

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