Advisers and employers urged to embrace shift towards defined contribution pensions and the further industry changes

April 18, 2016

In response to the impact of continual changes in the pension sector and market conditions, companies, advisers and individuals are being encouraged to embrace the shift towards defined contribution pension plans. By 2018, 91% of private sector savers are expected to be utilising ‘defined contribution’ pension plans as opposed to ‘defined benefit’ pension plans, according to the Pensions Policy Institute’s Future Book.

The industry wide step change towards defined contribution pension plans has had a significant impact on employers offering retirement plans for their employees, as well as high net worth individuals. This shift has placed much more liability on employees and individuals to take responsibility for, and plan for, their retirement.

‘Employers and advisers have a responsibility to help their employees and clients plan for retirement by making well informed decisions about their futures,’ said Meeku Patidar, associate director at Elian. ‘Historically, the defined contribution pension industry has encouraged participants to focus on their accumulated fund value and investment growth to fund retirement. We are seeing a change in focus towards targeting an income replacement rate to help make sure enough income is available for retirement.’

To meet the changes, Elian is launching six new structures that will provide employers and individuals with a flexible and sophisticated approach to retirement planning, focusing on income replacement. Five of these structures are master trusts and the industry is forecasting the use of master trusts to grow, with employers forecasting an increase from 4% currently to 13% in 2020 and a rise from just under four million members in 2015 to around six million members in 2030, according to a survey by AonHewitt. Technology will play an important role in this increasing membership.

‘At Elian, our holistic ‘income replacement’ approach takes into account a wide range of factors including age, inflation, interest rates, mortality, wage inflation and investment risk, enabling participants to target an income replacement rate suitable for them. Using financial modelling and technology systems, we can help employers and individuals work toward this, helping reduce the degree of uncertainty around the level of income individuals will receive in later life,’ concluded Mr Patidar.