The Spence Johnson Blog

By Nils Johnson, 19 November 2013Market Intelligence | DC Pensions

The future of workplace pensions is clear

It’s been 5 years since our first report on the Future of DC and now, as we near the end of 2013, we finally have real clarity on what UK workplace pensions will look like in the future1. The political consensus of two successive governments, and especially the work of the current pensions minister Steve Webb, has a lot to do with how far we have moved towards that future, but providers and Trustees, consultants and regulators have done their part too.

That future can be characterised by three broad features; a very high savings participation rate among private sector employees, very strong growth in individual pension assets, and a fiercely competitive marketplace for providers.

In practical terms, there is a lot of work to do but in most of what we see, there is room for optimism. For example, 1 year into auto enrolment, opt-outs stand at around 9% - as we predicted. We expect this to rise to 30% as smaller schemes stage; but even this level will be considered a huge success. In terms of affordability, average member charges now stand at 71 bps. But these will fall over ten years to an average 64bp; in fact, by 2023 members in all but the smallest schemes will experience all-in charges of 50bps or less.

This high participation rate will drive a phenomenal growth in assets. From a base of £214bn in 2013, assets will grow 12.2% pa to reach £676bn by 2023. In nominal terms, this translates into £35bn pa of member contributions flowing into DC accounts for each of the next ten years. The main beneficiaries of this growth will be large institutional style schemes with asset growth rates of 18% - compared to 10% for retail.  In a classical pattern of market concentration, over 50% of the AUM will end up in larger schemes with over 1,000 members.

With participation rates and asset growth projections like these, this market is going to get even more competitive. The bundled providers have suffered most to date but their experience should improve going forward with average price falls of only 1% pa over the next ten years. But with a 20,000 fall in schemes and Master Trusts capturing 23% of members, some of the 11 current providers are going to give up the game. The same can be said of investment suppliers where we expect a contraction of 25% in active third party managers. Most of the smaller IFAs will likewise be driven out of the value chain but better managed mid-sized EBCs and large consultants should adapt and thrive.

There is a lot more detail to be teased out in from these three broad trends, but for us, the future of workplace pensions is now basically clear.

1 See DC Market Intelligence, 2014 for a full list of predictions