A two-tier pension system of engaged and disengaged employers could emerge if scheme sponsors continue to focus on cost as a measure of value for money, the Defined Contribution Investment Forum (DCIF) has warned.
The DCIF fears the 75 basis point charge cap introduced in April 2015 has led the industry to focus too much attention on cost rather than value which, it said, could compromise member outcomes.
In a report looking at how the industry has adjusted to the cap and the resulting challenges, the DCIF said this unnecessary focus on costs stemmed from a difficulty in gauging what exactly constitutes good member outcomes.
B&CE director of policy and market engagement Darren Philp said: “What we mean by ‘a good member outcome is currently very difficult to define. With the recent Budget changes that introduced the new pension freedoms, the whole concept of people securing a guaranteed income has gone away. The regulator has done a lot of good work trying to define member outcomes in terms of inputs, but now more than ever the debate needs to focus on the outcomes that members are trying to achieve.”
The DCIF emphasised “cheaper isn’t always better”, especially when it comes to investment offerings. It said blending active and passive products was one way to achieve some of the benefits of active management, such as enhanced performance or better managed volatility, within the charge cap.
Vontobel Asset Management head of UK and Ireland Sheridan Bowers said: “The focus on cost has led many people to look at passive management, and with markets as they’ve been, that hasn’t delivered fantastic returns for members. There are benefits of active management within DC schemes, and if you want to bring that within the charge cap then you can combine a good tried and tested unconstrained active manager with a passive manager.”
Elsewhere, the body warned subsequent rapid growth in the number of subscale pension funds could hinder their ability to negotiate favourable terms with providers in the same way large funds could.
In addition, the DCIF observed that while auto-enrolment had successfully managed to increase the membership of DC schemes, contribution rates remained very low.
Professional trustee Nick Wheeler said: “Where we’ve got to be innovative is in the member communications targeted at trying to get members to step up their contribution levels. Even though we know targeting 10% contributions is likely to be too low in the long run, we are still well short of achieving even this modest target in many schemes at the moment.”
