By Will Mayne, 2 May 2013Market Intelligence | DC Pensions
The Pension’s Policy Institute (PPI) is currently working on research1 to determine the factors that govern whether an individual will obtain an adequate income in retirement. The details of the research will be fascinating but even now we can predict that the level of contributions made during working years will be critical to the eventual retirement income obtained.
Early engagement with the unfortunate reality of needing to save for life after work is therefore vital. The ABI highlighted in research2 in 2012 that “awareness and understanding of how defined contribution pensions work, and engagement with decisions that will need to be made at retirement, were very low”. The pensions industry is therefore eagerly listening for new ideas as to how to engage DC savers with their pension.
Work we recently participated in with the Defined Contribution Investment Forum has raised some interesting insights around this very question. The DCIF research3 explored one possible approach to driving engagement; that some funds could be built around a ‘social objective’. The research offered savers the opportunity to select pension funds that directed some assets to support social causes; sustainability, local communities and local businesses. The DCIF found that 77% of respondents favoured a social investment fund over a conventional fund. 44% of respondents still preferred their chosen social investment fund even when they were told they would receive an 8% smaller pot at retirement.
Although consumer research has well documented weaknesses as a predictive tool, it does indicate that some individuals could prefer a pension which directs funds to causes they value. The possible implications of this are intriguing. Would individuals be more likely to pay their pension more attention if it better reflected their values? Would directing money towards causes they favour leave consumers feeling more positive and empowered in regards to their pension? Could this impact contributions rates? With our estimates indicating there will be nearly 10 million more DC savers by 20224, these are questions worth considering.
1 What level of pension contribution is needed to obtain an adequate retirement income, Pensions Policy Institute, 2013
2 Shopping Around for Retirement Income: Unrequested Annuity Illustrations, Association of British Insurers, 2012
3 Identifying new ways to engage with savers in Defined Contribution Pension, Defined Contribution investment Forum, 2013
4 Defined Contribution Market Intelligence 2013, Spence Johnson, 2013