DC savers missing out on higher returns

A recent report suggests that savers in defined contribution (DC) pension schemes are missing out on higher returns because there is a lack of investment opportunities for the schemes.

According to the study, which was launched by then Chancellor Philip Hammond at the Autumn Budget 2018, retirement savings for the average 22-year-old could be boosted by between seven and 12 per cent if schemes made a small allocation to venture capital and growth equity funds.

The report provides an in-depth assessment of DC pension scheme investment in such funds, identifies the key risks and challenges to accessing them, and proposes potential solutions to overcome them.

The report concludes that DC investment in venture capital and growth equity may be especially important for younger savers in their twenties, whose long-term saving horizon may allow them to benefit most.

However, it adds that the potential increase in returns could even be significant for older workers. For example, a 35-year old with £25,000 currently invested in retirement savings could see a six to 10 per cent increase in their lifetime retirement savings, and a 45-year old with a £50,000 pension pot could see a six to seven per cent increase.

According to the report, since the implementation of auto-enrolment, more than 70 per cent of employees now save into a pension, with more than 90 per cent of active savers outside the public sector saving in a DC scheme.

Commenting on the study, a spokesman for the British Business Bank said that its objective is to enable better long-term retirement outcomes for the UK’s DC pension savers, whilst focusing on commercial solutions for the private sector.

Posted in Blog, Pensions.