New research from Hymans Robertson* has found a lack of governance of DC default investment funds. The research amongst some of Britain’s largest companies shows a clear disconnect between the way DC schemes are designed and reviewed, and the intention of providing a good retirement outcome for members. According to the research:
- Only 31% of directors say they set their DC default investment strategy with the aim of “delivering a target level of replacement income in retirement”
- 20% are “unaware” of whether they set their strategy in line with this goal or not, while 25% set their strategy only with the loose aim of “maximising returns for members”
- Around a third of companies also admit that they fail to regularly review the performance and suitability of their default investment fund
- While 59% have reviewed this within the past two years, the remainder either reviewed more than two years ago (13%), are unaware of when it was last reviewed (9%), or simply don’t know (16%)
- One quarter (24%) of HR directors admit they don’t know compared to 8% of Finance Directors
- Companies say helping their members save for retirement is the second most important reason for offering a DC scheme, behind only the historic UK PLC promise of doing so
- Reviewing default funds regularly is critical as 23% of consumers say their workplace pension will be their main source of retirement income
Commenting on the findings, Lee Hollingworth, Head of DC at Hymans Robertson, said:
“Our research confirms what many have suspected for a while – DC isn’t setup to deliver value for members at present. The evidence suggests that many DC schemes have been setup without any real thought as to the outcome or impact of their design, particularly from an investment point of view.
“There is a clear disconnect between the investment strategy of schemes and the aim of achieving good outcomes for members in retirement. In many cases the default fund, which is central to DC scheme success, is decided upon at launch and then left alone for years on end without regular assessment of whether it is aligned with members’ aims.
“DC may never deliver the security or certainty of a DB scheme, but there are several easy improvements that would drag DC a long way down the line towards it.
“The first of these is recognising that a one size fits all default fund is inadequate. Multiple default funds, based on different earnings bands and retirement income replacement rates, are a far better solution.
“Low earners, who will likely receive a higher share of their retirement income from the state, are almost certain to have different requirements and risk attitudes to high earners in the same scheme. To put them in the same default fund just doesn’t make sense if you are trying to reach retirement replacement income targets for each group.”
Laying out the case for improvements that need to be made to DC, Hollingworth added:
“Improving the quality of DC schemes doesn’t have to be expensive, and certainly shouldn’t just be all about higher employer contributions. There is a clear and present need to change the game on DC. To achieve this, there are four things we call on the Government to mandate companies to deliver on with regards their DC schemes. Non-binding guidelines and recommendations are no longer enough:
1. Regular review of scheme objectives: All DC schemes need a clear, mandated set of objectives, based on achieving appropriate outcomes for members at retirement
2. Regular review of default investment funds: Schemes need to pay real attention to what the default fund delivers for different types of members and put a structure in place that delivers the target outcome for each type of member. In many cases, this will mean several, rather than one, default fund
3. Effective, regular communication that means something to members: Communication needs to be simple, relevant and have impact to engage members, inspire them to make the appropriate decisions and take action. It also needs to focus on how members’ pension pots are performing in line with achieving a target income and highlight if they are not on track. Finally, a one size fits all approach will not work. Communications need to be targeted at the different types of members within a scheme and accommodate different levels of understanding, engagement and behaviour.
4. Honest assessment of whether DC is delivering: Companies need to regularly review their choice of DC delivery vehicle, the quality of administration, and member interfaces. In addition, investment charges need to be reviewed to check they are genuinely competitive and not hindering the return on investment for employees
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