Defined contribution (DC) has moved beyond its role as a simple retirement saving vehicle, with significant change ahead for the industry, according to a new report from the Thinking Ahead Institute (TAI).
The report – Shifts for the DC organisation of tomorrow – shows that DC is increasingly becoming a post-retirement income provision vehicle, with integrated accumulation phases matched to post-retirement consumption needs.
The report calls this “DC 2.0”.
“The need for change has been clear for a long time. Even 10 years ago, we were talking of a version 2.0 of DC that was built around the purpose of providing income throughout retirement,” said Bob Collie, head of research at the Thinking Ahead Institute.
“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 report highlighted that the need for change in DC is partly driven by pension inadequacy and lack of regulation, with the hopes that government will play a larger role in regulation of DC systems around the world.
The report comes as the Morrison government moves ahead with its systemic review of the Australian superannuation system, with a particular focus on providing adequate retirement income, removing duplicate accounts, and cracking down on underperforming super products.
TAI also forecasts the emergence of “DC 3.0” in the next five to 10 years.
DC 3.0 will be characterised by hyper-customisation that heightens effective member engagement and better fits individual circumstances, providing a “whole of life” service for consumers.
TAI believes that the move into DC 3.0 will be supported by stronger knowledge of customer base through technology-enabled engagement and a focus on integrated investment and spending solutions, including longevity tail insurance.
“The history of DC has largely been a story of evolutionary happenstance, rather than of working to a master design plan,” said Mr Collie.
“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 report draws on the findings of a survey of 10 DC organisations with a collective asset size of $80 billion.
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