Mercer has issued a list of ten priority areas for trustees, sponsors and those running Defined Contribution schemes.
According to Brian Henderson, Head of Mercer’s DC & Savings Team, “The fog covering DC has begun to lift, allowing decision makers to bring the future into focus. Expect big adjustments as the regulator’s DC quality features and the new rules on charges melt into the mainstream. Already, the Pensions Regulator’s DC Code, with its exhortations of assessment and ongoing review, is becoming a mainstay of DC governance. More will surely follow as regulatory efforts to improve member outcomes continue.
“We believe that growing recognition that most DC members are ‘reluctant savers’ and ‘accidental investors’ will likely prompt a rethink by employers and trustees. For example, we are seeing the old DC paradigm of widening choice and maximising investment returns yielding to new ideas based on targeting actual benefits at retirement. The focus now should be on providing pensions that people value. Helping savers achieve an adequate pension in retirement will ultimately address most of the success criteria that employers set for their DC schemes”.
The ten areas are taken from Mercer’s Confident DC Trusteeship course. The course is being held on selected dates across the UK and is open to Trustees and decision makers in HR and Finance. Confident DC Trusteeship aims to improve the skills and knowledge of those involved in the the provision of DC schemes ultimately helping companies provide pensions people value.
1. A good outcome is a good income
Most savers share the same aspiration- to live comfortably in retirement. However, few translate that into an actual goal based on replacement income in retirement. Decision-makers should consider how they can use online tools and targeted communications to help savers set goals for an adequate income in retirement.
2. Learn to think backwards
Sponsors, trustees and savers have typically sought to maximise returns on each pound invested, subject to appropriate risk considerations. However, an outcome-orientated approach to retirement saving starts with identifying what income a saver needs in retirement. Only when that is decided are decisions made on how much needs to be saved and the level of investment risk required. In other words, let the ends drive the means.
3. Help employees to save a little, often
Employees can be deterred by the amount that needs to be accumulated in order to retire comfortably. Employers should help them conquer fears of big numbers by highlighting how the small numbers - the amounts that need to be put away, week by week or month by month – can build into the big number. Features such as auto escalation allow employees to agree to regularly forego incremental amounts of pay over a set period in return for a higher pension contribution.
4. Know your members
Most DC savers are likely to adopt default saving and investing patterns. Some, however, will be more confident about financial decision-making and may look for more opportunity and guidance to make their own decisions. Demographic analysis, combined with analysis of saving habits and occasional member surveys can help those running schemes understand their member profiles and so target scarce resources and communication messages more effectively.
5. Know yourself
Those running a DC scheme should have a written statement on the purpose of the DC scheme and the desired outcomes for members. Is it your company’s objective to help employees achieve an adequate pension in retirement? Does it want to provide tools to help employees plan their retirement journey? Or is the motivation more to do with being competitive competitive ? A structured session aimed at formulating beliefs on these issues will bring clarity of purpose to DC boards. It will also help decision-makers’ focus time and resources effectively and determine how much DC governance is needed to achieve their aims.
6. Consider whether your scheme is de-faulty
Research shows that over 80% of DC savers typically participate in their scheme’s default investment arrangement. So making sure the default fulfills the regulator’s criteria of being “suited to the needs of members” is likely to be the single most significant action that can be taken to improve investment outcomes.
7. Take charge of charges
Reducing fund charges from say 0.8% to 0.5% might - all other things being equal - increase a 35 year old’s expected pension at retirement by over 10%. It’s important to establish what’s being offered in return for charges. DC boards should review whether better value can be obtained for savers - either by negotiating with your existing provider or finding a new one.
8. From ‘annuity’ to ‘a new idea’
The guaranteed income offered for life by an annuity is likely to remain the right solution for most members. However, some members may wish to defer annuity purchase until they get a better understanding of their needs for income in retirement. Others may wish to wind down gradually and phase the receipt of pension. These alternatives, and whether they can help improve outcomes for members, should be investigated.
9. Set goals
Just as savers should be encouraged to set goals aimed at achieving an adequate pension, DC boards should similarly focus on unambiguous goals based on desired outcomes. Additionally, like higher performing corporate boards, DC boards should aim to become seats of challenge, review and continual assessment as they channel limited resources in ways that best add value to savers and the employer.
10. Decide whether to ‘build’ or ‘buy’ DC governance
A structured session aimed at helping sponsors determine their own preferred amount and style of DC pension governance should be undertaken. Consequently, the sponsor can decide whether this governance is best ‘built internally’ (e.g. via a governing board comprised of DC members and senior leaders at the sponsor) or ‘bought externally ‘(e.g. by outsourcing certain investment selection functions or participating in a Master Trust).
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