DC 2024 Outlook

2023 was a year many would characterise with high interest rates, high inflation and major geo-political tension. Markets have been driven by the mega-cap US tech stocks nicknamed “The Magnificent 7” with other equity relatively flat. In the UK, the Government and regulators paid more attention to the DC pension market since the advent of auto-enrolment.

We saw an increase in focus on providing decumulation options to members and how guidance and advice can support that part of the journey. The Autumn Statement proposed further clarification on consolidation of very small pots and introduced a proposal of a ‘pot for life’ model for DC members. Implementation of the value for money framework remained high on the agenda, as we await regulations. Investing more productively in private and illiquid investments also gathered momentum.   

Looking forward, the DC market is set to continue to change significantly, as trusts look to access private markets (equity, debt and alternative investments), providers and members themselves adapt to increasing variety of decumulation demands, Employee Value Propositions evolve and of course political developments. 

Improving member outcomes through private markets 

We’ve seen a considerable push over 2023 to unlock private market investments for DC savers. 2024 will see the launch of long-term asset funds (LTAFs) for the first time by many providers. These LTAFs will enable access to the illiquidity premium that can be derived from private market investments for the Trustees of many schemes. The Chancellor is continuing his push to unlock this asset class and drive UK based investment and venture capital, this is in addition to the creation of the Growth Fund through the British Business Bank. It remains to be seen what a potential change in Government next year will bring for some of these proposed changes. 

Through 2024, we expect to see a new range of funds appearing for many Trustees to consider, which include private market investments through LTAFs, potentially at a higher pricing point. Appetite ultimately will be determined by the size and scale of the schemes who have the necessary support to access them. A few of the large schemes already have access to private markets and we expect this to increase during 2024. 

The decumulation market 

Future retirees are becoming increasingly reliant on DC benefits for their pension provision, both at and through retirement. This reliance comes with a need to also navigate complex retirement decisions. Increasing longevity and reduced levels of pension income also mean DC savings must work harder, and this is a trend that the pensions industry is rightfully focusing on. Providers will be evolving their decumulation products to meet the ever changing needs of members. Trust-based schemes will be required by the Pension Regulator (tPR) to have support in place, and eventually a default decumulation option. Member education and understanding will be essential. Innovation in decumulation is a priority for tPR. In the coming years, there will be a focus on value over cost and building a seamless retirement journey for members. 

Pensions within a company’s employee value proposition (EVP)

A strong EVP helps a business become more attractive to employees. Over the last few years, we’ve seen employers considering their EVP and how they develop this to help attract and retain good talent.  

Part of an employers’ EVP will include their reward and benefit package, including pension offering. With inflation still high and individuals looking to manage the cost of living, promoting the value that employers give through their reward and benefits offering will be under increased scrutiny.  

Further, many employees are increasingly paying attention to the values of their company and how these align with that of their own – eg around sustainability, diversity and inclusion. If a company’s policies reflect the needs and priorities of their employees, this will further enhance their Employee Value Proposition, and ability to prove commitment to their people. 

Whilst the focus to date might have been at corporate policy level, many of our clients have already started to consider the way their pension scheme dovetails with their company’s wider policies, including sustainability, diversity and inclusion. We expect this to continue into 2024. The regulator is shining a light on both such areas, and employers will need to consider this too within their pension and benefit package to remain attractive, personal and compelling to their employees.  

Political and regulatory  

The Government’s enhanced attention on DC in 2023 was welcome. We need to see this continue in 2024, with three high priority areas: 

1. Broaden the focus on collective defined contributions (CDC) to a wider permissive regime, enabling the introduction of a range of risk sharing decumulation solutions to support members. 

2. Progress and conclude the slew of initiatives and consultations from the Mansion House speech and Autumn Statement to give a clear future vision for DC provision in the UK. 

3. Set a clear approach for the future value of the State Pension and how this is managed over time.

All of this must be done in such a way that it doesn't disrupt other activity underway such as the launch of Pensions Dashboard, or undermine current DC success stories like auto-enrolment.  

As we approach another election, more potential changes in direction are ahead. Pension policy is a long-term game and this is inconsistent with election cycles and the immediate priorities of the Chancellor at the time. A single independent body should be created to be responsible for UK pension policy.  

Diversity, equity & inclusion 

The DWP reported a 35% gender pensions gap in June 2023. To address this, we suggest introducing auto-enrolment (AE) credits for carer responsibilities, and mandate disclosure of employer gender pension savings gaps. We also advocate for the removal or reduction of the £10,000 AE earnings trigger, making it easier for multiple job holders, who are often women and ethnic minorities, to start saving for retirement. It’s our belief these solutions can be achieved through government and industry collaboration. 

With change across how pensions are invested, how benefits are taken and to wider regulation to come over 2024, it’s important to understanding potential implications. Please contact your usual Hymans Robertson consultant if you would like to discuss these issues further. In the meantime, we hope you have a lovely winter season. 

 

This blog is based upon our understanding of events as at the date of publication. It is a general summary of topical matters and should not be regarded as financial advice. It should not be considered a substitute for professional advice on specific circumstances and objectives. Where this blog refers to legal matters please note that Hymans Robertson LLP is not qualified to provide legal opinion and therefore you may wish to obtain independent legal advice to consider any relevant law and/or regulation. Please read our Terms of Use.