The survey of 109 UK DC schemes, with more than half a million members and £35 billion in assets, showed that only 30 per cent of schemes regularly monitor individual fund performance as experienced by members, contrasting with 90 per cent of schemes who monitor performance against market indices/benchmarks. Even fewer schemes (15 per cent) monitor performance against tailored objectives designed to deliver a good outcome for members.
Chris Inman, head of DC Investment Advisory at Aon, said: “While the concept of a good outcome is generally recognised across the pension industry, no clear definition of it currently exists, and which can therefore be incorporated into investment strategies. With the diverse nature of DC scheme members only increasing, greater clarity is needed to aid targeting a sustainable level of retirement saving.
“Setting specific targets for the aggregate default investment option allows schemes to see the bigger picture and understand whether their default investment is delivering a good outcome for members. This will be increasingly important amid the uncertainty in today’s investment markets.”
Chris Inman continues: “We see this as an opportunity for schemes to enhance and improve how they manage the savings of DC members as well as how they monitor performance. DC investment strategies are more effective when driven by target member outcomes, rather than de-risked along a pre-established path regardless of progress toward a target or investment market movements - as is the case with the typical lifestyle approach of automatic switching.”
Incorporating ESG
The survey also found that four in 10 schemes (42 per cent) now assess all their investment options against Environment, Social and Governance (ESG) criteria, up from just one in 10 two years ago. While responsible investing is gaining more traction among investors, the findings show that there is still a wide variation in schemes’ approaches to ESG.
Jo Sharples, DC solutions chief investment officer at Aon, said: “Over the past few years, schemes have spent more and more time on ESG. We are seeing real progress here, with 56 per cent offering one or more ESG options within the wider fund range.
That said, we know most members use the default option for a variety of reasons, ranging from apathy to not wanting to have the responsibility of making investment decisions.
“We think this should be a real focus area for schemes to make better decisions. Unless ESG considerations are incorporated into default strategies – and currently just 15 per cent of schemes do this – they will not reach the majority of members. Furthermore, as public opinion on responsible investing becomes more high profile, and greater reporting is required from schemes, some may face difficult questions on management of ESG risk.”
Rising inflation
While a period of low inflation has prevailed for much of the past two decades, that is changing and will increasingly become an issue.
Jo Sharples said: “From an investment perspective, trustees and scheme sponsors will need to navigate this new volatility and evaluate the impact of higher inflation on their default strategy. They will then have to consider whether changes are needed in order to manage this risk for members.
“Over the long term, we see equities providing good protection for younger members. On the other hand, for those closer to retirement, default strategies typically include more defensive fixed-income assets, which are more sensitive to rising inflation. When combined with increased governance, more focus on ESG considerations and an uncertain market outlook, all of this means more work for trustees and scheme sponsors.
Jo Sharples continued: “We suggest trustees and scheme sponsors go back to the basics in order to form a solid foundation of what they are trying to achieve for their members. They need to consider their principles and beliefs, and the objectives against which they will assess their success. This should allow them to reaffirm conviction in the current strategy and governance approach or highlight areas for change.”
Better Outcomes by Design – 2022 DC Pension Scheme and Financial Wellbeing Survey
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