Defined contribution pensions

Today, 3.6 million people are building benefits in workplace DC pensions, trust and contract-based. The growth of DC brings new challenges on governance, adequacy, communications, investment, and decumulation.

The NAPF has sought to help members meet these challenges.

DC investment

Through our work on the Investment Governance Group we have helped to develop new standards on investment governance for DC schemes. We have also contributed to the development of thinking on default investment funds, especially for the new NEST scheme, currently scheduled to come on stream in 2012 and which could potentially provide pensions for 7 million people. However, we have made it clear that Government should not prescribe the content of DC default arrangements.   The DWP recently published guidance on offering a default fund in DC schemes used for auto-enrolment which can be found on the DWP website here: http://www.dwp.gov.uk/docs/def-opt-guid.pdf

Enabling good member outcomes

In our response to a major consultation on the future of DC by the Pensions Regulator, we argued strongly that scale and good governance should be the key elements in the DC schemes of the future. Both could be provided through Super Trusts – large-scale, multi-employer DC schemes that would be run by boards of trustees. We set out a vision of the future of DC in which the UK’s large number of small DC schemes would be replaced by a small number of large-scale Super Trusts.

Small pots

The development of Super Trusts could also help solve the small pots problem. A study from the Institute for Fiscal Studies (IFS) which was jointly funded by the NAPF showed £1.4bn is already trapped in 700,000 stranded workplace DC pension pots worth less than £5,000. In late 2011, the DWP launched a consultation on ways to resolve the small pots problem, which is likely to get worse after the introduction of automatic enrolment. In its response to the consultation, the NAPF reiterated its call for a new way of thinking about DC pensions. Large scale, good quality trust-based pension schemes would secure better outcomes for savers and would also deal with the small pots problem. The NAPF called on the Government to set up a framework for new Super Trusts that will make it less likely that people will transfer their pension pots, and give them the opportunity to consolidate their existing pension provision.

Annuities and decumulation

With millions of people set to be automatically enrolled into DC pensions over the coming years, it is important that the DC pensions market can deliver the outcomes people need and want in retirement. The NAPF is working to improve the way people make retirement income choices. Decumulation choices are particularly important as people can increase their income in retirement by as much as 20-30% by choosing the right annuity.  And unlike the decisions people make whilst they are saving, decisions made at retirement are often one-off and irreversible.  Responding to the ABI’s consultation on its Code of Conduct on at-retirement communications, the NAPF argued that a default process needs to be in place where most DC scheme members have access to brokering services to help them shop around for the best deal. This will help people make better choices in retirement.

Transparency of pension charges

The NAPF is working to improve the transparency of pension charges ahead of the introduction of automatic enrolment by leading the development of an industry-lead Code of Conduct on the disclosure of DC pension charges. The Code of Conduct will ensure the employers have the information they need to choice the right pension scheme for their employees ahead of automatic enrolment.