This year’s survey drew insights from 214 UK defined contribution (DC) schemes, with combined assets of over £60 billion and with more than one million members.
Key findings:
• Nearly half of all respondents (47 percent) are considering a change to their DC structure;
• Two-thirds (65 percent) of those running pension schemes do not know how much a typical member can expect at retirement;
• Seventy percent monitor investment fund performance against benchmarks, but only 29 percent monitor what this means in aggregate for a member invested in a default arrangement;
• Offering an employee share scheme is around twice as popular as a workplace individual savings account (ISA) (40 percent compared to 22 percent); and
• The most common default retirement age remains 65 despite the increasing state pension age.
Ben Roe, senior partner and head of DC consulting, at Aon said: “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 percent 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.”
Strategy and Design
The survey results reveal that the most popular approach for pensions is still to offer a benefit that is in line with competitors (42 percent). That is ahead of offering a pension designed to deliver sufficient funds to enable employees to retire at a reasonable age (36 percent). The trend to mastertrust pensions continues, with around a quarter of employers who are currently using other structures, expecting to be in a mastertrust in five years’ time. This still leaves more than half of current schemes expecting to maintain their existing own trust and pension schemes.
Steven Leigh, associate partner at Aon, said: “Aligning your pension offering with those of competitors remains the most common tactic – and is a somewhat backward step from our previous research in 2022. Then - for the first time - we found the most popular response was to offer a pension that was aimed at providing sufficient outcomes. Given the importance that making appropriate decisions can have on DC savers’ eventual outcomes, it is encouraging to see that 42 percent of schemes are prioritising specific communication or engagement objectives. At the same time, and considering the potential impact of investment returns, we would perhaps expect more than a third of schemes (32 percent) to focus on this.
“At the other end of the scale, it is also surprising given they are such a key determinant of pension outcomes, to see that just 17 percent of respondents are prioritising increasing member contributions. Concerns about cost-of-living pressures may have moved the focus onto other priorities, but these should be weighed against the benefit – where possible - of early saving towards retirement.”
Contributions and Adequacy
The median default contribution rate remains at around 6 percent from the company and 4 percent from the employee. However, there is a big difference between the highest and lowest rates across all schemes. The survey results reveal that only around one in three (35 percent) respondents 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 percent) of respondents say they consider DC member outcomes based on the Pensions and Lifetime Savings Association’s Retirement Living Standards.
Steven Leigh said: “While it is fantastic to see our survey respondents focusing more on value for money, it is also crucial to understand the connection between good value and good outcomes. It’s therefore disappointing that so many do not have a clear view of the expected outcomes for their members. At 65 percent, this level is similar to our research in 2022 and shows a distinct lack of progress in understanding this fundamental element of workplace pensions.
“Knowledge of likely member outcomes – and using recognised metrics such as the PLSA’s Retirement Living Standards - is the starting point for assessing whether a pension scheme is delivering good value. This understanding can then inform decisions on what actions would best deliver improved outcomes - and whether any specific groups are falling behind.”
Investment
The survey reports that 70 percent of schemes monitor component fund performance against benchmarks, but only three in 10 monitor what this means for the aggregate performance for a member invested in the default option. Forty-one percent of schemes now assess all their investment options against environmental, social and governance criteria, while one in 10 are currently investing in illiquid assets.
Joanna Sharples, CIO for DC solutions at Aon, said: “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.”
Engagement and Wider Financial Wellbeing
Three-quarters of schemes provide wider financial wellbeing support in addition to pensions, or plan to provide this in the next two years. Offering an employee share scheme is around twice as popular as a workplace ISA, at 40 percent compared to 22 percent.
Steven Leigh said: “A focus on financial education, including pensions, as part of a financial wellbeing programme continues to gain pace and is now starting to become a core tenet of an overall wellbeing strategy. While this progress is to be applauded, employee engagement with pensions continues to be a challenge. Supporting DC savers with their wider finances is key to improving their engagement in a pension scheme. This not only means they can plan holistically for their retirement but also gives them a better chance of saving for the long-term once their immediate financial priorities are met.”
At Retirement
Among respondents, 35 percent currently 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.
Steven Leigh, said: “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.
“It is encouraging to see from the survey that a fairly large proportion of schemes have different types of support in place. This is key as quality support through to retirement will maximise the chances that most members make their own informed choices for better outcomes.”
Aon's Five Steps to Better Workplace Pensions 2024 - DC Pension Scheme Survey
|