AUTO-ESCALATION IS THE FUTURE
Others however, take a more cautious approach to the prospects for micro-investing in the UK DC market.
Trafalgar House’s Taylor finds it difficult to foresee it becoming part of the mainstream for two reasons: firstly, he questions whether sophisticated enough platforms exist for it to be rolled out en masse; and secondly, he wonders whether a convincing case can really be made in support of adding such small amounts into schemes.
“It is reliant on being able to make a compelling enough case for [whether] sweeping in £3.50 this week is likely to see a return of £x in 30 years,” he says. “So I am not totally convinced it will be anything other than a talking point in the UK.”
Wellington Management investment director, global multi-asset strategies, Matthew Bullock, is cautious for a different reason, believing it is wrong to be too innovative when it comes to creating investment strategies on any scale.
“Because you create things that are too complex; things that, at some point, will not work in the way the investor expects,” he said during PI’s aforementioned roundtable.
For Taylor, a more likely development will be the growth of auto-escalation, a design built into a pension scheme that automatically increases contributions on a set date at regular intervals. The idea is that members ultimately save more into their pension without noticing the effect on their take-home pay.
“Anything to do with auto-escalation or any mechanism for calculating and applying an increase in contribution is easy to implement as those technologies have been around for 30 or 40 years,” he adds. “So in the savings space that is the one area that has the biggest, easiest win.”
For Douglas meanwhile, save more tomorrow, a concept more familiar in the US where people give up a small part of future salary increases to put into their pension scheme, could be used to a greater extent in the UK in the future.
“It is another way of getting people to have no pain today to sign up for something that is happening to them in the future when they have more money anyway,” she says. “Or we get tougher on auto-escalation so it does not stop at 8% but goes up to 12%.”
However, not a huge amount of schemes are using save more tomorrow or auto-escalation and one barrier appears to be apathy from certain employers to offer anything above the minimum necessary. Anything above and beyond this is seen by some to add additional layers of complexity and governance.
“Certainly those who rely on the auto-enrolment minimum-type schemes will probably just continue to do that and that will be the driver to savings,” says Taylor. “What motivation will they have to add more complexity to their arrangements? Probably none.”
Some employers will indeed opt for a lowest common denominator approach, but others, led it seems by the large master trusts, are embracing technology and helping make saving easier for members. There may be a vested commercial interest there, but at least it is one way to elevate contribution levels in a pension scheme.
