We are seeing the emergence of a new pensions divide

The process of automatic enrolment got underway at the end of last year. By 2017, millions of employees will have been enrolled into a workplace pension for the first time by their employer. By and large they will end up in ‘defined contribution’ (DC) schemes, whereby the individual savers are fully responsible for the risk of investment losses. Essentially they will get lower retirement outcomes if their pension pot doesn’t perform well in the capital markets.

This contrasts with ‘defined benefit’ (DB) schemes, which are of course increasingly rare, whereby the final outcomes are determined in advance (usually related to an employee’s salary), and employers are liable if the pension fund does not perform well enough to pay out the accrued benefits as expected.

The idea of a pensions divide originally related to the difference between these two approaches. DB pensions are much more secure, but not necessarily less generous – if contributions are high and investment performance good, DC pensions can deliver. In recent years, these conditions have too often not been met. As more and more people are enrolled into DC pensions, however, it is right to distinguish between different types of DC provision. To coin a phrase, there is more than one way individualise a pension risk. In certain regards, the divide within DC provision is greater than the divide between DB and DC.

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Image: Lord Manley