A third generation of DC schemes could emerge within the next five years that better address adequacy, coverage, engagement and technology, according The Thinking Ahead Institute (TAI).

The not-for-profit research group believes that the development of 'DC 3.0' will be characterised by hyper-customisation and integrated whole-of-life management.

This will mean that DC provision will move beyond being a tax-effective savings vehicle and become highly tailored to individual's circumstances, more cost-effective, better governed and tech-savvy.

In a new paper, TAI has said that DC needs to change rapidly to address problems around sufficient saving levels, “primitive” post-retirement income arrangements, poor engagement from members and “weak commitment and low resilience” from scheme sponsors.

TAI has questioned ten organisations on four different continents that it felt offer a “leading-edge” on emerging practices in DC and says that although each DC market is driven by local considerations, some global ideas on how to improve DC have emerged.

These include an increased focus on retirement income, a drive to scale, and a redefinition of the role of the employer. The importance of regulation should also not be overlooked in producing a stronger DC system, says TAI.

Scale is a vital theme, according to TAI, as staying competitive in the face of regulatory and administrative challenges, and keeping up with technological change, is becoming increasingly expensive.

'DC 3.0' will therefore, it says, emerge out of further industry consolidation, which will result in large master trusts and other multiple employer platforms.

It says that regulators could help in this area by appropriating scale arrangements, with such scale then enabling investment in innovation.

Scaling could also improve the DC industry’s inefficiency in dealing with its long tail of very small DC arrangements, and in helping workers who have accrued multiple small accounts.

TAI argued that regulation also needs to adapt to savers’ ultimate needs for better adequacy.

It says that some fiduciaries feel unable to take the action they consider to be in DC members’ best interest in the absence of fiduciary protection.

For example, using member information to improve investment design introduces an outcome risk that inhibits taking such a step in many countries.

“Ideally regulation should support — for example through more active use of safe harbour provisions — a fiduciary focus on participants’ interest, rather than on the avoidance of blame,” says the report.

Conduct risk also needs to be tackled, says TAI.

“If conduct risk is too closely associated with performance outcomes, the goal of outperforming peers is awarded the primary place, even though it is not necessarily aligned to achieving member goals. Ideally regulation should be far better implemented in its interpretation of good practice relative to bad practice.”

Regulators should also be stronger in “fostering” lower costs. “Asymmetries of power and knowledge have been responsible for an industry that has been extremely costly to individuals and remained so even with technology driving down aggregate costs in many areas,” argued TAI.

TAI head of research, Bob Collie, has said that 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,” he said.

“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.”

Collie added: “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.”

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