Over two-thirds of employers plan to use their existing Defined Contribution (DC) plan to automatically enrol their employees, according to a new survey by Towers Watson, while NEST is being largely ignored with only 4% of employers definitely planning to use it as their core pension vehicle for automatic enrolment purposes.
With automatic enrolment starting later on this year, the Department for Work and Pensions has estimated that over the next five years, five to eight million employees are expected to start saving or to save more in workplace pensions. The evidence taken from the Towers Watson DC Governance survey 2012 suggests employers believe their existing DC plans best serve the needs of the majority of their existing and future employees.
This year’s survey shows a striking increase in the focus on investment issues by DC plans in the UK compared to 2009, when the survey was last published, both in terms of the design of the fund range and default strategies to accommodate members who don’t make investment decisions. In contrast to 2009 when DC plans wanted to spend more time on investment issues, it appears that most fiduciaries now regard their current focus on investments as appropriate.
Nick Cook, senior consultant at Towers Watson said: “The research shows us that the large majority of fiduciaries want to actively help employees get the most from their plan and have focussed much more on investment options and default investment strategies over the last few years. The default option is where most DC members end up, so this focus on default design can add appreciable value to employees’ standard of living in retirement.”
Alongside the increased focus on investment matters, fiduciaries also admitted that they generally do not understand the needs and wants of their DC members – only a third felt their plan’s investment fund range was tailored to their specific membership. This is particularly evident amongst contract-based plans where it is still common to offer members a choice of more than fifty investment funds.
Nick Cook said: “It is questionable as to how effective the increased focus on investment has been if fiduciaries are still not clear on what their members’ value and require. It is also debatable whether the particular needs and wants of DC members are ever really met or justified by simply offering a huge number of investment funds.”
The survey also explored the barriers to better DC governance and found that fiduciaries see these are being a lack of time and the fact that the competing demands of defined benefit (DB) schemes still ‘crowd out’ the focus on DC. The latter point was also found to be the case for contract-based plans where there is no direct link between an employer’s DB and DC arrangements. Towers Watson suggests that such pressures on fiduciaries are only likely to worsen with the influx of new members as a result of automatic enrolment and the continued closure of DB arrangements, which still requiring on-going oversight even when closed.
Nick Cook said: “While employers and fiduciaries appear to favour their existing DC plans to automatically enrol employees, they should not be complacent about the challenges they will continue to face as the hurdles to good governance of DC pension plans remain high. If these governance challenges are not tackled head on, existing DC plans run the risk of becoming the poor relation in the DC world, especially as the demands on DC governance are likely to continue to grow at a faster rate than the resources available.”
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