The shift from Defined Benefit (DB) to Defined Contribution (DC) pension provision, unaccompanied by Financial Education for Young People, has the potential to precipitate socio-economic crisis.
Recent years have seen the vast majority of UK based DB pension schemes close to new members (according to Pensions Insight just 13% remain open to new members), with many of these closed funds also closed to future accrual for existing members.
These closures represent the final acknowledgement of what has been industry consensus for some time; the DB system of retirement provision is unsustainable. There has been much debate surrounding a suitable replacement. DC is proving to be the most popular alternative, with other systems being mooted but failing to achieve mass adoption. DC has a wide variety of consequences and challenges for members, pensioners, policy makers and industry practitioners alike.
By far the most significant repercussion has, so far, not received sufficient attention. As DC replaces DB as company’s retirement plan of choice there is a shift in responsibility taking place: from the corporate to the individual.
Generations of young people will be responsible for making decisions about their retirement provision: How much money will be required in retirement, how to achieve this through adequate pension contributions, when to make those contributions, which asset classes to invest in etc. Under DB these responsibilities were taken on by the corporate employer and in DC, to some extent through default strategies and auto-enrolment, the corporate employer remains involved but crucially the end responsibility going forward will rest with the individual. Moreover, under DB, the corporate employs actuaries and investment consultants in order to advise them on contributions, investment strategy and risk mitigation.
Under the DC system, many of these choices will be made by individuals who have no formal training at all. This is a serious problem compounded by longevity and an ageing population. It has the potential to create a socio-economic crisis and, at worst, inter-generational conflict.
At Redington, supported by our partners, we are addressing this issue. At the start of 2013 my colleague Jonathan Letham and I, with support from Redington’s Co-Founders Robert Gardner and Dawid Konotey–Ahulu created RedSTART – a high impact financial education programme for young people. So far we have provided 113 teenagers from Newham with some of the tools they will need to plan their financial futures.
We are all super excited about the programme and have received glowing feedback from the schools we’ve been working with.
Rob, Dawid, Jonny and I would like to invite all of the pension’s community to join us in driving the initiative forward. If this sounds like something you’d be interested in getting involved in get in touch:
· Come and watch
· Teach a session
· Take ownership of the RedSTART franchise at your firm
“I feel very passionately that our youngsters need to have financial education and I believe that it should be part of the school syllabus. I believe that part of the reason why the financial system and the country is in such a deep recession and debt crisis is because we have never been taught how to manage money properly and the level of financial literacy amongst adults is poor. Many don’t understand basic budgeting skills and certainly don’t understand compound interest either from a positive savings point of view or from a negative debt point of view. I plan to continue to work with RedSTART to educate the youngsters.”
**Hannah Foxley, The Women’s Wealth Expert **