Third generation DC plans to emerge within 5-10 years

With the pace of change accelerating, the next ten years of defined contribution are set to be more interesting than the last ten.

LONDON, 14 October 2019 – The Thinking Ahead Institute’s (TAI) has today released research that describes an industry on the cusp of significant change. The challenges that need to be addressed in DC systems include coverage, adequacy, technology, a lack of trust and lack of engagement with participants. 

The new research argues that DC version 2.0 is now emerging, and behind that lies another generation of plans – version 3.0 – that will be characterised by hyper-customisation and integrated whole-of-life wealth management. It’s not just that the system needs to move beyond its role as a tax-effective savings vehicle, it also needs to become more customized to individuals’ circumstances, more cost-effective, better governed and more tech-savvy.

Bob Collie, Head of Research at the Thinking Ahead Institute said: “The need for change has been clear for a long time. Even ten years ago, we were talking of a version 2.0 of DC that was built around the purpose of providing income throughout retirement. It’s only recently that real progress has started to be made on that front. But momentum has been building, and we expect to see things develop much more quickly from here.”

The research draws on the findings of a survey and interviews of ten leading DC organisations and covered organisations’ mission, operations, governance, investment, member engagement, retirement income strategies and sustainability. Responses demonstrated strong alignment in many areas, but that there is, as yet, no clear winner in the battle between paternalism and libertarianism.

Even though each DC market is driven by local considerations, global themes did emerge. These include the increased focus on retirement income, the drive to scale and a redefinition of the role of the employer. The importance of the regulatory role should also not be overlooked in enabling and driving the shift to a stronger system. 

The report foresees continued industry consolidation in response to commercial, governance and technological demands. The growth of master trusts and other multiple employer platforms is an important industry development. 

Collie added that: “The history of DC has largely been a story of evolutionary happenstance, rather than of working to a master design plan. DC has become the world’s dominant pension vehicle, and work is needed if it is to live up to the responsibilities of that role. The next few years will be pivotal ones in the development of retirement systems all around the world.” 

About the Thinking Ahead Institute

The Thinking Ahead Institute was established in January 2015 and is a global not-for-profit investment research and innovation member group made up of engaged institutional asset owners and service providers committed to changing and improving the investment industry for the benefit of the end saver. It has over 40 members around the world and is an outgrowth of Willis Towers Watson Investments’ Thinking Ahead Group, which was set up in 2002.