Relaunching DC: D is for Diversified, C is for Control
30 Apr 2018 - Estimated reading time: 2 minutes
This week at a DC pensions conference I attended, there were complaints about the negative press of recent DB pension failures tainting the success story of auto-enrolment and DC in general. The ‘all pensions tarred with the same brush’ argument. We all know bad news sells.
By contrast, the conference presenter praised the positive headlines around superannuation ‘super’ in Australia. Having been a trustee for several years in both Australia and the UK, the speaker’s comparison made me ponder: why do Aussies appear to love their super? Of all people, I’m acutely aware of the dangers of making comparisons as the two systems are fundamentally different. But is there something in the messaging to Aussie ‘super’ members that we could adapt to build a more positive image for UK DC?
Firstly, defined contribution isn’t a term used much in Australia because it’s the norm. It’s just super. Labels matter because they shape attitudes. Is attaching the term ‘pension’ to DC something we could just stop? DC is now the new norm in the UK and we need a DB divorce. Auto-enrolment sounds like something to do with elections, or schools. How about auto-saving? Workplace saving? I’m sure the comms specialists can come up with something, dare I say it, super?
In pensions industry bumf, DC is often distinguished from DB by the statement: DC members bear all the investment risk. From a member’s perspective, that sounds scary. It says: DC is risky! And DB isn’t? As the transition from DB occurred in the 1990s, one of the key attractions of DC for Australian employees was its diversification away from single employer risk. If you’ve lost your job due to employer failure and your DB pension has gone into the PPF, you probably wish that your future income stream was not as dependent on your employer as your current one. Australians like the idea that DC diversifies your current and future income streams: if you leave or lose your job, your pension will be safe, separately-managed and portable. That’s a distinctive benefit of DC worth telling members about.
Secondly, Australians’ super contributions are, and are seen as, an employee right, effectively part of their pay. What that means is Aussie workers see super as their money right from the start – it simply goes into a different (albeit longer term) tax-effective investment account to the rest of their wages. They have a strong sense of ownership.
Do UK private sector employees see their employers’ matching contributions as a right? Do they see their DC pension pot as theirs? I’ve observed local focus groups where DC members said they felt distanced from their pension and unsure what happens to it when they move jobs. The number of deferred or inactive accounts is exploding. Yet, when it comes to people’s finances, one of the most highly sought-after benefits is control. And that with that control – I can see it, move it, add to it when I want – comes trust. These positive attitudes can lead to the holy grail for DC trustees – a higher likelihood of increased personal contributions.
To build a sense of member control and ownership, Australian super schemes offer a host of features and services within their schemes. For example, letting members know (text, email) when their contributions arrive and confirming that have been invested – a more positive, reassuring message than a ‘deduction’ on the payslip. Consolidation services where the scheme will combine old DC accounts for you to create a bigger balance, reduced fees and reduced admin. Not pot follows member, but member controls pot. And topping up when you have some spare cash? Just use BPAY from your bank account – no barriers to boosting your super.
It seems there’s more to Australian’s sunny attitude to super than just the weather. DC offers meaningful benefits of Diversification and Control that UK DC members would value, if only they knew! A relaunch is needed and as we head into higher auto-enrolment contributions, now is the time for DC2.