Defined contribution schemes are facing new realities and clear trends are emerging across different geographies. These include the acceleration of the known shift from DB to DC, employers re-evaluating their DC arrangements as evidence continues to emerge that many employees do not recognise the value of DC provision and also employers recognising that to attract and retain employees it is essential to understand the needs of employees at different stages of their work/ life cycles.
As these trends continue to grow we see the most important characteristics enabling good member outcomes as being, fair value, member communication that is targeted, relevant, engaging and ongoing and which avoids jargon and access to advice that is both financial and practical.
Monitoring of all funds and removal and replacement of underperforming funds is also crucial, as is enabling reasonable and realistic contribution levels, reducing the scope for poor fund choice by directing members towards well-designed default funds and providing non-default investment funds that match the membership profile.
All of these characteristics need to be underpinned by good governance and all are substantive challenges in their own right, but it is perhaps the last two points which have attracted the most interest in recent times. Their impact is heightened in a changing legislative context.
For example, in the UK the recent introduction of auto-enrolment and the default retirement age being removed are drivers of change.
Traditional roles within DC are also changing. The role of the employer is moving from provider to facilitator and insurance companies are offering a broader range of savings and benefits opportunities to the workforce.
In certain DC markets, we see investment platforms becoming increasingly important distribution channels for asset managers, and members are able to access specialist investment strategies, mainly through consultant-advised blended funds.
The ability to neatly deliver fresh investment solutions directly to members is what makes workplace savings solutions on platforms really stand out. But how does this enable better outcomes for DC members?
The ability to neatly deliver fresh investment solutions directly to members is what makes workplace savings solutions on platforms really stand out
In short, the trick is to design efficient investment options that are aligned with member’s basic needs. To do this we can split members into distinct groups of behaviours and design funds to match their profile. All funds can be white labelled, with names reflecting their risk and return profile rather than the asset classes held in the fund.
Our approach at Mercer is to build a structure around three groups of members: “Do it for me”, “Help me do it” and “Leave me to it”.
The first group can be offered the default arrangement, while the second group can select from a range of pre-built funds.
The “Leave me to it” group can then have complete freedom to build what they want from a list of branded manager funds as well as the pre-built blended funds.
Within the core range of funds it should be possible to offer both a range of well-diversified growth funds and a range of target date funds. The growth funds should blend best ideas across asset classes and managers, bringing in asset classes such as emerging market debt and commodities which are not traditionally used in DC investment strategies.
As might be expected, members will be invested in a growth vehicle for most of their working lives, but when they approach retirement they will be asked to choose a target retirement fund that best reflects their likely retirement date and their requirements for income in retirement.
We believe that asking members to make these decisions five or ten years from retirement provides a much more realistic decision-making horizon than traditional target-date funds which often ask members to make decisions about their retirement when this is 30-40 years away.
By keeping a firm focus on the management of the assets at all times and aligning these with member behaviours and understanding, it should be possible to deliver better outcomes.
While not guaranteed, what we do deliver should at least be in better shape and ultimately more closely aligned with member expectations.