Almost half of the DC schemes with assets of over £60bn are considering making changes to ensure they remain competitive and deliver value to members, according to new research.
Aon’s DC pension scheme survey found schemes are prioritising good value, with 70 per cent now monitoring investment fund performance against benchmarks. When it comes to fund performance, 41 per cent of schemes now assess all their investment options against environmental, social and governance criteria, while one in 10 are currently investing in illiquid assets.
However, most trustees do not have information on what members in the default arrangement can expect to retire on — and whether this is likely to provide an adequate income in retirement.
Over all the survey found that just one in three (35 per cent) scheme know what sort of pension outcome a typical member of their DC scheme can expect. Of those that do know, just over one in five (22 per cent) of respondents say they consider DC member outcomes based on the Pensions and Lifetime Savings Association’s Retirement Living Standards.
When it comes to looking at fund performance, the survey found that just 29 per cent of schemes monitor what the fund performance means in terms of expected outcomes for scheme members.
When it comes to contribution levels Aon found that the median default contribution rate remains at around 6 per cent from the company and 4 per cent from the employee.
However the survey did find that three-quarters of schemes now provide wider financial wellbeing support in addition to pensions, or plan to provide this in the next two years. Offering an employee share scheme though remains around twice as popular as a workplace Isa, at 40 percent compared to 22 per cent.
When it comes to strategy and design, Aon found that the most popular approach for pensions is still to offer a benefit that is in line with competitors (42 per cent). That is ahead of offering a pension designed to deliver sufficient funds to enable employees to retire at a reasonable age (36 per cent).
The trend to master trust pensions continues, with around a quarter of employers who are currently using other structures, expecting to be in a master trust in five years’ time. This still leaves more than half of current schemes expecting to maintain their existing own trust and pension schemes.
Aon also asked about at retirement option, and found that around a third (35 per cent) of schemes have a preferred financial adviser firm to support members at retirement, with a further 15 percent planning to do so.
Most DC schemes report that less than 10 percent of members have selected their own target retirement age, although 40 percent do not measure this. Over six in 10 schemes have a drawdown option for members, but 25 percent still have no plans to offer one, despite most basing their default investment on their members accessing savings in this way.
Aon senior partner and head of DC consulting Ben Roe says: “With the amount of continual change in the UK pension landscape, it can be challenging to prioritise the ‘important’ from the ‘urgent’, and to move from ensuring regulatory boxes are ticked, to focusing on activity that makes the most improvement to outcomes for DC savers. That’s why it’s encouraging to see the continued prioritisation of understanding and improving member outcomes.
“However, despite this focus on good value from 61 per cent of schemes, it is a concern that nearly two-thirds of schemes do not know what this means for the expected pension outcomes of their scheme members.
“We know that retirement adequacy is one of the themes of the new government’s pension review – and I welcome this. We have seen some great results when working with schemes by looking at expected outcomes across their membership, helping them to identify any gaps and then taking focused action.”
Aon associate partner Steven Leigh adds: “The use of ‘defaults’ in DC schemes has generally been effective in getting people to save at a basic level in their DC pension through to retirement. But currently there is no default decumulation solution, so while the introduction of Pensions Freedoms allowed savers choice around how they take their DC benefits, it has meant greater responsibility being placed on the individual. When the ‘crutch’ of suitable defaults falls away – as it does at retirement when faced with this choice – effective member support is crucial in reducing the risk of DC members undoing years of good work by making bad decisions at retirement.”
Aon CIO for DC solutions Joanna Sharples adds: “Most DC savers do not make their own investment decisions, which means that the choice of a good default option can make a huge difference to member outcomes. The default investment option for pension scheme members needs to get the right balance of target returns over inflation in the long term, versus mitigating downside risks, as well as supporting the way in which members will access their DC pension savings in retirement.
“The gold standard is to monitor default strategy performance against scheme-specific targets for investment returns and volatility. This allows those running schemes to understand how their default investment is performing in relation to delivering a good outcome for their members. Only 12 percent of schemes currently monitor their default investment performance against their own specific return targets and even fewer at 9 percent, against volatility targets.”