Defined Contribution
Ensuring individuals can maintain their standard of living throughout retirement is fast becoming the biggest socio-economic policy challenge facing many governments.
We have moved from a defined benefit system of generous pension provision, collective passivity and certain outcomes, where everything was done for members to an increasingly less generous defined contribution (DC) system, with greater individual responsibility and less certain outcomes.
Having long been the dominant mode of pension provision and that which remains by far the biggest in terms of scheme assets under management, defined benefit (DB) must confront a myriad of challenges if it is to deliver on the pensions promise. Against the backdrop of a challenging economic environment for both scheme sponsors and trustees, trustees must also contend with the effects on both sides of the balance sheet of historically low interest rates, improving longevity, an ever increasing regulatory and legal duties burden, greater complexity around investment choices and, for many, navigating the challenges of being cash flow negative as schemes mature and the time remaining to make good any deficit reduces – all of which requires the continual evolution of governance, technical knowhow and risk management. The latter, in particular, must increasingly integrate ESG risk factors and that most systemic of global risks, climate change, into trustee decision making, as well as risk transfer and end game planning given the increasing maturity of DB schemes.
In addition to the introduction of measures to sustainably increase the number of long-term savers and savings rates over longer working lives, more fit-for-purpose DC investment strategies for both the savings phase, which is overly dependent on equities and the post-retirement phase, in a world of freedom and choice, are sorely needed. In delivering robust risk-adjusted returns, while at the same time protecting savings against market turbulence and inflation, these solutions need to be managed dynamically, embrace ESG, notably climate risk, increasingly invest in diversifying less liquid assets, such as real estate and infrastructure, given their potential to deliver secure, inflation-linked returns over the long-term, and adopt a transparent fee structure that offers savers genuine value for money. However, generating DC retirement outcomes that can be enjoyed and not endured is also a function of improved scheme governance and realising the benefits of scale from consolidating the multitude of micro DC schemes – initiatives that are mutually reinforcing and which principally rest with policymakers.
Our DC thought leadership and solutions capability addresses these and other key determinants of better DC retirement outcomes by reaching out to all stakeholders – policymakers, regulators, providers and practitioners – so acting as a catalyst for change, as well as making the seemingly unintelligible, intelligible and unworkable, workable.
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