Are DC pension schemes meeting the needs of all workforces – and can scheme design and engagement strategies for different groups within society ensure that they do?
Both corporate advisers and providers, while noting the success of auto-enrolment, acknowledge an inherent challenge – that systems built on defaults and inertia do not lead to high engagement, and this has implications for trust and diversity.
Participation v engagement
Timothy Lancaster, senior consultant at Aon says: “Auto-enrolment has been a major success in expanding participation in pension saving, but participation is not the same as engagement or trust.
“And while diversity, inclusion and wellbeing are often high on the agenda for those managing DC pensions, structural factors may mean attention is naturally drawn to the needs of more vocal and engaged groups, with the result that the needs of other, less visible members can be
under appreciated.”
Kelly Parsons, head of DC proposition at Broadstone agrees. “DC schemes work well for some employees, but not equally well for all, particularly where pay is lower, employment is fragmented, or financial pressures are high.
“AE has been a clear successin driving participation, but it has not addressed key challenges around contribution adequacy, member engagement and understanding, or confidence in retirement outcomes.
“Cost of living pressures also mean pensions compete with more immediate financial priorities, which disproportionately affect younger, lower-paid and more diverse workforces.”
She says the issue isn’t just scheme design but how firms communicate with employees and whether schemes are reviewed and adapted as workforces evolve. “It’s important to focus on regular benchmarking and outcomes-based reviews, rather than taking a ‘set and forget’ approach to DC.”
Diversity challenge
Louise Williamson, head of Aviva Master Trust, says: “Recognising diversity within workforces and pension schemes is fundamental for building trust. Our members represent society today, from all walks of life, so our approach must be inclusive and varied.
“Engagement and communication should be tailored. Through initiatives like our voluntary Discovery Hub member panel, we gather a wide range of views, helping us understand the different challenges and
goals of our members. This input shapes decisions that genuinely serve their interests.”
She points out that master trusts, like Aviva’s, support employers across all sectors, from supermarkets and airlines to schools and legal firms. “We must be equipped to serve a whole cross-section of society, from those with modest pension pots to members with substantial savings or multiple sources of wealth.
“Financial literacy also varies widely, even within the same sector. Our communication, governance and investment strategies aim to be flexible and responsive, to help support this.”
She adds: “Decisions affecting members’ financial futures must be data driven. Aviva’s Insight Hub provides information, including projected retirement pots, positioning against Pensions UK retirement living standards,
and monitoring gender pension gaps at scheme and employer level. This helps us work with employers to tailor solutions to meet scheme needs.”
Much, obviously, depends on the generosity of different employers but that extends not just to contribution levels but also the willingness to fund more engagement.
Jamie Jenkins, director of policy at Royal London, says: “The central premise to AE is that everyone will need or at least benefit from having some private savings when they reach retirement, and all workplace pension schemes serve that simple purpose.
“However, the generosity of different employers differs widely, with some paying the minimum, 8 per cent of a band of earnings, and others paying significantly more. The amount paid in will be the single most certain determinant as to how well provisioned employees arein retirement, likely outweighing any variation in charges or investment returns.”
He adds more generous employers are also more likely to support meaningful communications, driving employee engagement and helping them optimise retirement outcomes. He adds that the challenge is that people switch jobs frequently so this engagement should encourage them to also look at deferred pots from previous employments.
Jenkins also points to interesting patterns around opt-outs with younger people less likely to do so than those in the 50- to 60-year old age bracket. “This seems counter-intuitive, with older workers being closer to retirement and younger people facing more immediate challenges, such as buying their first home.
“The answer to this appears to lie in what younger people have perceived as a societal norm, i.e. you start work, you save for retirement in your workplace scheme as everyone else does. For those closer to retirement, the common reason for opting out is that they believe there is little that can be done at that stage.”
But he adds that opt-out rates remain low, despite the challenging economic backdrop of recent years.
Hymans Robertson head of DC provider relations Shabna Islam echoes Jenkins: “DC pension schemes have been increasingly meeting needs of a diverse workforce, however there are some gaps to fill in meeting the needs of all workforces. More can be done to help part-time workers, low earners, those on varied working patterns/career breaks, and those with different cultural views around savings.”
However, she warns that other reforms such as the scale requirement, could prove a distraction, from the innovation required to bolster inclusivity.
Lancaster adds that recent industry research shows encouraging progress at a governance level, with the proportion of boards operating under a formal equity, diversity and inclusion (EDI) policy having roughly doubled to around 40 per cent. Almost 60 per cent of boards have reviewed or plan to review EDI as part of board effectiveness.
However, he adds that less than a third of schemes report having completed EDI initiatives that are focused on member engagement.
Faith-based considerations
Parsons adds: “Different groups engage with pensions in very different ways, influenced by factors such as income stability, cultural attitudes to saving, trust in financial institutions and competing financial pressures.
“Our work shows that a one-size-fits-all approach to communication is ineffective. Technical language can disengage many members, while generic messaging often fails to resonate with individuals at different
life stages.
“The industry needs to move towards clearer, simpler, jargon-free communications, alongside financial education that links pensions to real-world outcomes rather than abstract fund values. Support should also recognise that pensions sit alongside broader financial wellbeing, not in isolation.
“Employers have a critical role as the trusted gateway, but they need advisers who can translate complexity into meaningful, accessible engagement.”
She adds that pensions have also not been designed with faith-based considerations front of mind. “For Muslim savers in particular, barriers can include concerns around Shariah compliance, limited awareness or visibility of suitable options, and a lack of clear communication explaining how investments align, or do not align, with faith values.
“Our view is that progress requires greater transparency in underlying investment strategies, clearer signposting of alternative faith-aligned investment options, and improved education
for employers and trustees so these conversations can be handled confidently.
“Importantly, this is not only about developing new products, it is about ensuring existing options are clearly articulated, and avoiding assumptions about individual preferences based on background alone.”
In terms of faith-based considerations, Lancaster adds: “A significant proportion of Muslim employees remain outside workplace pensions because conventional defaults can conflict with Islamic principles. While Shariah compliant options have existed for some time, they have often been seen as niche, stand-alone self-select funds, requiring confidence, knowledge and to be switched to proactively.
“This is why recent developments, such as Shariah-compliant lifestyle approaches, are helpful in lowering barriers to access for people who want to invest their pension savings in a way that aligns with their values.”
Islam agrees that these have been helpful, but there is more still that can be done. “Although Shariah-compliant investment funds exist, the choice of funds is limited.”
She says Shariah compliant funds in other asset classes, for example, property, would be desirable. “In some cases, savers are unaware that Shariah-compliant options exist so more should be done to raise awareness of these options.”
She adds: “Purchasing an annuity at retirement or later life is not possible for Muslim savers, because annuities are not Shariah compliant. Alternative guaranteed income for life solutions would be desirable for Muslim savers.
“Zakat (charity) is payable on wealth by Muslim savers. In some cases this includes DC pensions savings although not accessible until retirement. Awareness of this obligation, and planning for the zakat payable could be better supported. Other faiths could also have needs that could be better supported.”
Wider considerations
Lancaster says the these divesity principles extends beyond faith. “For people with variable working patterns, lower earnings, limited financial resilience or lower confidence in financial institutions, focusing on pensions and retirement may not be the most effective way to build trust and effect sustained behavioural change.”
Islam adds: “People’s relationship with their pension is often shaped by a combination of cultural background,
financial literacy, financial and mental wellbeing, trust in financial institutions, and their personal circumstances.
“Younger workers prioritise saving for a deposit on their first home rather than long-term savings, therefore have a need for flexible savings vehicles.
“Low earners prioritise saving for emergency funds and managing cost of living, potentially opting
out of pension schemes to meet these needs, missing out on employer contributions.
“People of different backgrounds, such as ethnicity or gender, may face challenges that reduces their confidence in the pension system.”
A more inclusive approach to DC needs to take into account all these various different aspects.
BOX: Inclusive pension strategies
1. Introduce contribution models and saving options that reflect varied working patterns, particularly for lower-income and part-time employees.
2. Provide and raise awareness of investment options that accommodate diverse ethical or religious preferences noting the impact on long-term outcomes.
3. Test out scheme design with different demographic and cultural groups.
4. Increase financial education amongst targeted groups, using trusted channels by partnering with employers, community organisations, and faith groups to improve financial literacy in a context people trust.
5. Move away from single generic messaging to all members to more individual, segmented communications that resonate with different groups.
6. Use technology and AI to hyper-personalise messages to make them timely and appropriate for varying confidence levels.
7. Offer ethical or faith-based default funds from day one of investing, rather than positioning them as niche options which could be perceived as risky, and also mean members have to transfer into them after joining a scheme’s main default.
8. Clearly explain how investments align with specific values to build confidence among more sceptical communities, using multiple trusted channels.
9. Ensure product development includes direct input from the communities the products are intended
to serve.
10. Avoid complex structures that may create confusion or mistrust among those unfamiliar with financial terms.