Trust on the employer & contribution levels

  • Alex Cave

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. The environmental, social and governance (“ESG”) considerations discussed herein may affect an investment team’s decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.

As the UK DC marketplace continues to grow, we are increasingly drawn to the challenges that members face as they save for retirement. The global pandemic has created significant challenges for all of us and for many savers has made saving into their pension a luxury they can ill afford (source BLK DC Pulse 2020). This, however, has not affected people’s aspirations for retirement income. We have consistently seen a minimum income replacement goal of around two thirds salary over the last 5 years. Whilst achievable, this objective will be a stretch for most, requiring significant personal and employer contributions, combined with positive asset returns for extended periods of time. In reality, I fear many will find they need to work longer or retire poorer without a significant change in approach. It’s something policy makers, sponsors, advisors, trustees and asset managers need to work together on to resolve because the answer is not going to be found in 8% contribution levels and simplistic index investments.

For many members invested in DC schemes through their workplace, having the liability lay on them rather than the employer, can be a cause of uncertainty. Recent analysis from Scottish Widows showed that two thirds of people do not feel adequately prepared for retirement and are worried about running out of money.(1) This data is very similar to our own, as highlighted in our recent DC Pulse survey. One way that members can help feel reassured when preparing for retirement is by maximising monthly contribution levels. By emphasising their pensions contributions, especially in early career stages where it will be invested into predominately equity allocations, members can capture the long-term growth prospects of equities and give themselves a real chance at building a decent retirement pot. There are several pieces of research, including the PLSA and TISA, which underline how important the savings process is and how the mandated 8% contribution(2) through auto-enrolment should not be seen as the minimum level needed to deliver a comfortable spending profile.

  1. Scottish Widows, June 2020
  2. PLSA, 2021

Increasing contribution rates is just one of the many solutions that exists, although, encouraging members to do this is far easier said than done. One of the rolling challenges we face, is that many individuals believe that employers are still responsible for providing the certainty that previously came with a defined benefit pension.

As a result, the engagement and understanding levels are still shocking - with nearly 90% of the members we surveyed unaware of the levels of risk in their portfolios, and only 1 in 20 aware of how their pension was invested. Whilst there is some understanding that the liability sits with them, the truth is that education and financial literacy sound like an unaffordable luxury, particularly at the moment when employment, health and home schooling are far more pressing concerns. What members really want is for someone else to sort the problem out for them, and that’s why we are wholly supportive of the different initiatives to create a long term contributions escalator of automatic increases, which can get contribution levels to an appropriate level in a way that doesn’t unduly pressurise individual or corporate spending power too quickly.

So, what are BlackRock doing about it? One area which could help reduce the contribution burden is private markets. We are working closely with the government, regulators and industry at providing access to illiquid investments. There are challenges to overcome in both policy and infrastructure but there is a collective intent to solve these obstacles. Where is the appetite for private markets in DC? We see demand from some of the larger schemes but for most schemes the focus is more on costs and particularly on how schemes can keep them low to demonstrate good value. Whilst it is important for investment costs to be continually challenged, cheap does not necessarily equal good value and the exclusion of tools which could increase the size of retirement pots seems short sighted. I think we need a policy framework which helps trustees by defining what good outcomes look like for members, and gives them an infrastructure that provides the best possible chance to achieve that. Within that structure there is doubtless a place for ensuring that costs are appropriate, but the starting point must be the retirement outcome.

When I look back at last year’s performance, there are some pleasing stories - many DC defaults delivered strong returns for their members, helping them weather the COVID volatility and, in the end, achieve healthy double-digit growth. When I think back to the volatility and anxiety when we were in the eye of the storm in 2020, I have to see that as a good outcome.  I think there have been some great developments in the market, with DC in many ways leading the UK in terms of the consideration of ESG risks and adoption of Sustainable investments. The conversations on sustainability and increasingly private markets, show that there is a growing desire to improve investment design. With a clearer focus from regulators and policy makers I think we can culturally shift to a forward-looking mindset.

Alex Cave
Managing Director
Alex Cave, Managing Director, is Head of Defined Contribution at BlackRock.
Read biography
Up your DC game
In July 2020 we ran our BlackRock DC Pulse Survey of 1,000 UK DC members focusing on: retirement confidence, importance of retirement savings in participants’ financial planning, sustainability and COVID-19.
Up your DC game