Irish Pensions Magazine Spring 2014
14
Expert Opinion
What’s ahead for DC?
The Defined Contribution (DC) pension arrangement
continues to grow rapidly accounting for €30bn of the
€80bn in retirement savings in Ireland at the end of 2013.
As Defined Benefit (DB) schemes continue to fall away
more and more people will come to rely on DC pensions
to provide for their retirement. With this growing
importance of DC attention is & must turn on the
development of this pension concept and on ensuring
that it is fit for purpose.
Why DC?
The greatest benefits of DC pension arrangement are
that they are much more suitable for a more modern
more transient workforce. DB pensions perform best
for those who start their working life with one employer
and remain in situ until retirement. However the DC
option allows for a mobile work life and gives a much
greater choice of investment options and flexibility in
contributions. However, the control expended to savers
in a DC arrangement means that members have to
actively engage and as there is no defined benefit – the
investment process carries a lot more risk.
Challenges
The DC system in Ireland has become unnecessarily
complex and tax and regulatory issues have driven the
setting up of many small schemes that would otherwise
be contract arrangements. This aspect features highly in
the recent Pensions Board Consultation on the Future of
DC Pensions, but could be dealt with at the stroke of a pen
by rationalising the tax and regulatory rules to ensure the
same provisions apply to all DC arrangements, whether
trust or contract.
The IAPF is working to shape pensions that are secure,
fair and simple and we believe this can be achieved in DC
pensions. There are a lot of good schemes that are being
effectively run and provide good value to members and
we should build on these.
As outlined in our contribution to the Pension Board
Consultation document we believe the key considerations
that need close attention for the ongoing development
of DC pensions include the following:
• Communication is paramount in delivering a workable
retirement savings vehicle to the public. Pensions are
usually explained in a complex manner which has
resulted in a disinterested and disengaged worker. It
is the responsibility of all those involved in the sector
to encourage retirement planning by presenting the
benefits of pensions, and in particularly, DC arranged in
a clear, concise and compelling manner. The Pensions
Board, in conjunction, with the sector needs to develop
and implement communication programmes that will
achieve this.
• Trustees: The work of “lay” trustees needs to be
acknowledged and supported, especially since the time
spent on trusteeship for many lay trustees occurs out
of office hours, is in addition to the usual demands of
workand in themainnot remunerated. The regulatory
framework needs to encourage the participation of
well trained and supported lay trustees. Experience
shows that lay trustees frequently are an important
trigger for member engagement within the culture
of a sponsoring employer’s workforce.
• Action needs to be taken to address the number
of single member and very small schemes and an
evaluation carried out as to why these continue
to be established and maintained. The differing
taxation rules applying to differing arrangements
are a significant driver, in which event tax anomalies
must be addressed as a first step.
• Investment: The biggest risk faced by DC members
is not having adequate income in retirement. In
order to obtain return members have to take some
risk. Clearly there are times where members need to
be less exposed to risk e.g. approaching retirement,
although even that is becoming blurred by the
options available at retirement. The introduction
of standardised risks classifications might be useful
as it is important that members are aware of the
type of fund they are invested in. However a default
strategy will need to take into account the types of
members in a scheme, their general risk appetite
and the format of their likely benefits at retirement.
For instance, some providers have now introduced
member specific default investment strategies based
on issues such as a member’s need for tax free cash
versus pension income. It may also be difficult to
keep guidance relevant and up to date in a quickly
evolving investment world.
• Transparency & Costs: The Pensions Board should
look at a standard means of disclosing costs. Total
ExpenseRatio (TER) shouldbeappliedas abenchmark
disclosure item in all pension arrangements. Having
a standard means of disclosing costs would help
trustees, as would publishing a range of market
standard costs so trustees know where they are and
should be aiming for. Value for money isn’t just about
lowering costs and the services being provided also
need to be considered.
Ultimately if we are going to add to the DC system
through auto-enrolment or mandatory pensions we
need to get the existing system right first. The regulator
and sector needs to come together to ensure that the
DC system is secure, fair and simple and therefore is
fit for the purpose of helping people provide for their
retirement.
The Future of DC
by Jerry Moriarty
* This article was published in the Sunday Business Post
on 16th February 2014
