On Aon Podcast: Improving Retirement Outcomes

Jennifer Brasher:
Hello, my name is Jennifer Brasher, and I have been a colleague at Aon for 12 years. I'm currently the head of U.S. Retirement. Today, we are talking about improving retirement outcomes. The value defined contribution accounts like 401(k) plans in the U.S. and other savings have decreased due to volatile markets. As businesses look for ways to help employees close retirement savings gaps, retirement plans are evolving. Streamlining and delegating retirement plan administration is a key way companies could better meet employees' needs and focus on their core business. For several years, pooled employer plans, known as PEPs, and master trusts have been gaining momentum globally. As the name implies, these next generation defined contribution retirement plans allow employers to combine their retirement plans with other organizations. This means less administrative work, less risk and lower costs for employers. Employees too may benefit, since the lower fees can lead to more assets in their retirement plans. Employees can also receive better support, leading to improved participant behaviors and better retirement outcomes.

Our modeling shows that up to two years of extra retirement income can be achieved in one of these solutions. I'm honored to have with me today three Aon Wealth Solution colleagues to talk about this topic. Byron Beebe is our global chief commercial officer for Wealth Solutions, Rick Jones is head of our Aon PEP in the U.S., and Tony Pugh is a defined contribution solution leader in EMEA. Thank you, everyone, for joining us today. Before we get started, I'd like to ask everyone a quick warmup question. Byron, I'll start with you. What is one piece of career advice you'd give yourself if you were just entering the workplace today?

Byron Beebe:
Yeah, that's a great question. I talk to a lot of young people who are starting the day and they kind of want to know exactly how their career is going to move forward. And what I would say is don't worry so much about that, just say yes. All of us on this call are retirement plan experts, but if you asked us when we started our careers if we would be doing this today, we probably would have all laughed at you. So, what we're doing with retirement plans is very different than what we were doing when I started my career 32 years ago. And so along the way, I've just kind of said yes to my employer as they've asked me to take on new projects, to my clients as they've asked me to try new things. And so, just by saying yes, I feel like I've had a really rewarding career, but all of that career has really just been working with retirement plans.

Jennifer Brasher:
Great. Yes, Byron. And I've been in business a little bit more than you at 34 years, and I would say that it is more challenging now than it was when I started in 1989, and there's still a lot that we need to do in this space. So, Rick, maybe a little bit easier question for you. What color most accurately captures your current mood?

Rick Jones:
Wow, that's a good one. I want to say Aon red, but I'll actually say green, because green is the color of growth and action and momentum and whether it's a stoplight or anything else, and that's really how we feel about the solutions we'll be talking about today, and how they can help companies and their people grow and move forward. So, green is the color of the day for me.

Jennifer Brasher:
Oh, I like green, too. And finally, Tony, what is it about the retirement profession that most inspires you?

Tony Pugh:
Can I answer that in two parts for me? And the first of is when I started working, which is longer ago than Rick, yourself and Byron, by the way, in the DC business, I started working with some really great companies very early on. So, global companies, small UK companies, got to do a lot of travel, meet a lot of people, and that was really fun, great stuff. I really enjoyed all of that. But then now I'm in my three decades-plus in the DC business, now actually, the penny has dropped. But what we are doing is much more important than working with great clients. We're helping those clients, great people, retire a better future. So, all the work we do every day, by building better DC solutions for our clients, is actually translating into real benefits and better future lives. And it sounds corny, but it's true. That is what we're doing and that's what we're delivering to our clients and their people. I find that inspiring.

Jennifer Brasher:
Great. Well, what a great warmup, everyone. So, now let's jump right into the meat of the material here. So, the first question, what trends are you seeing with multi-employer plans globally? Byron, I'll start with you.

Byron Beebe:
Yeah, I'll sort of back up here just for a minute and talk about defined benefit plans for a minute. I mean that, for a long period of time, in many countries, was the predominant way to provide retirement income for employees, and that's changed quite a bit over the number of years. And so, more and more employers have moved towards defined contribution plans. That has become the primary source of retirement income for a lot of employees today around the world. And I think employers are trying to do all the right things. They're trying to work with employees to help them build wealth, which can be used to provide comfortable retirements. So, that all sounds great, but the way we've gotten there has been sort of interesting.

Every employer, in order to get there, has started their own defined contribution plan in every country around the world when they want to provide those benefits, and then they've been asked to sort of become retirement experts. Administering those plans isn't as easy as it sounds. Governments have gotten involved, I think in a good way, to try to protect those assets for the employees. But the more and more governance we require, it really requires more of the employer to do more than just put money in somebody's account. They actually have to administer these programs and think about them, pick investment lineups, and negotiate fees, and that is really complicated.

So, if you think about that, it's really an inefficient system. And around the world, I think employers and other countries, and the employers in those countries, are catching onto this idea of it would be better and more efficient to pool resources together and leverage that in the marketplace to provide better solutions at lower costs for employees. We've seen this work in countries like Australia for a number of years, but in the last decade, this has really picked up momentum.

In Ireland and the UK, this is certainly a hot topic. This was introduced in the U.S. We call them different things. We call them superannuation funds or master trusts or pooled employer plans in the U.S., but the same concept here has been around for three years now in the U.S., and it's just starting to pick up steam. And the employers that have joined these programs around the world have found that they can accomplish, really, their objectives. They can help employees build comfortable retirement benefits without having to take on all that administrative burden. And by saving fees along the way as we pull these resources together, that puts more money in the employee's pocket when they leave. And that really is what the whole goal here is. So, I think these programs have been very successful so far. I just think they're going to pick up steam in the next decade, and most employers, really of all sizes, are going to start looking for these vehicles everywhere around the world where we can accomplish this.

Jennifer Brasher:
Great. Thank you, Byron. Rick, what would you add to Byron's response about our trends we're seeing with multi-employer plans in the U.S.?

Rick Jones:
Yeah, I'd just like to amplify one point Byron made about the transition from defined benefits to defined contribution plans. And as I look at the defined benefit plan world, the traditional pension world, there's been a huge focus on de-risking and outsourcing and further focus on core business. And I think we see the same exact thing playing out in the defined contribution market for 401(k) and 403(b) plans. Again, this focus on de-risking, outsourcing, doing more with less and really freeing companies up to focus on the core business.

Jennifer Brasher:
Great, thank you. And Tony, what about you and EMEA?

Tony Pugh:
Just to build on what Byron was saying, Byron, you referred to employers who believe that pooling is the way forward. What we're seeing in EMEA is actually governments agreeing with that and taking action to push employers towards considering multi-employer arrangements. So, they're taking direct action to make sure that employers are putting in plans or making sure that their plans are fit for purpose and well governed, with the views certainly expressed by the UK government that they believe that larger plans provide better value and are better governed than many single employer smaller plans.

So, in particular, in the UK, the government’s mandated that if your scheme is sub £100 million in assets, then you have to conduct an annual value for money test to compare that to a larger plan, such as a master trust or a multi-employer arrangement. And if the outcome of that test is that a larger plan will provide better value, then you have to take steps to merge your plan into a multi-employer arrangement, such as a master trust. And then there's the next step. We're expecting the regulator to push schemes that are much larger than the hundred million to do the same test. More widely across Europe over the last couple of years, there's been a piece of legislation, I'm sorry, I'm going to say what the acronym is, is it IORP II, I-O-R-P II, and that is introduced a whole range of governance requirements on DC pension arrangements, which has, in turn, led to an awful lot of employers moving towards multi-employer arrangements to absence themselves from those regulations.

And even wider still in the Middle East, we've seen governments, including Dubai, setting up national level retirement savings plans, leveraging the multi-employer concept. Now I'd say this, the growth in multi-employer arrangements across Europe and the UK and Ireland, it's probably been the biggest systemic change I've seen in the industry since the closure of DB plans happened 10, 15, 20 years ago. And to add a number to that, if I may, a recent survey from a company called Broadridge in the UK shows that they're expecting master trusts in the UK to grow by £500 billion over the next 10 years. So, this ball is rolling, and it's getting bigger every day.

Jennifer Brasher:
Great. Fascinating. And I think we're going to see the same trend here, Tony, in the U.S. We were a little bit slower to the market on the pooled employer plans, but we're seeing that and we're predicting the same growth by 2030 or so here. Okay. Let's move to question number two. What is the current state of the market, and how does this impact employers when it comes to retirement outcomes? So, Rick, let's start with you on this one.

Rick Jones:
Sure. So, at Aon, we are focusing our PEP on mid-size and larger organizations, and we've really constructed our offer to be valuable in that space. There are many PEPs also available in the market that focus downmarket, and we applaud that because those companies and those people need as much help as they can get as well. Our offers are getting great traction. We've been very successful with young and growing companies. We've also been very successful with household name organizations that are engaging in spinoffs and really viewing this as the easiest way to get a competitive and comprehensive 401(k) program set up for the new organization. So, in general, we find it doesn't take organizations very long to quickly warm up to the idea of pooling and a PEP. As for retirement outcomes, the costs are typically decreasing significantly, 40 percent or more for participants, and that results in more money staying in participants' accounts and growing for retirement.

You mentioned it briefly earlier, Jennifer, but this could lead to an additional two years of retirement income for an individual where they've got, again, more money in their accounts to be spent during their retirement years. In the future, we'll continue to see costs go down, and the delivery platforms will get even more robust as the solutions take off even more. So, really, what we're seeing is PEPs are a great way to enhance the value of the employee benefit, and that actually can lead to decreased employers' costs as well, which we think is a pretty cool equation.

Jennifer Brasher:
That's great, Rick. Tony, what do you think?

Tony Pugh:
Okay, so I'll just broaden that out a little bit, again, referring to Europe and the UK and Ireland. As alluded to a little while ago, we're seeing lots of regulation, and that regulation is being put in place to enhance levels of consumer protection and value for money. And we've also seen regulators pushing hard on pension arrangements to divert investment strategies around ESG, investing in long-term asset funds and the like. So, what that's building is an environment of huge amounts of regulation. And that, of course, then introduces much more risk of employers trying to do the right thing, trying to do the best thing for their employees, but yet falling foul or risking falling foul of legislation or regulatory requirements that, in turn, will lead to penalties, bad publicity, not a situation that any employer's going to want to find themselves in.

So, that, and other facts, has been a trigger for employers to review their DC pension arrangements. And Aon conducted a survey last year, 2022, in the UK, which showed that a staggering 48 percent of employers are looking to review their current pension plans with a view to moving to a multi-employer arrangement. So, there's lots happening, and those are the reasons that we are seeing these things start to happen. But like Rick, my firm view is that a multi-employer arrangement really does stand to deliver better outcomes to members than a standalone employer plan, given all the advantages of scale and the like that they have.

Jennifer Brasher:
Great. Thank you, Tony. Byron, do you have any final thoughts on this question?

Byron Beebe:
Yeah, we just put one other point out there and that is as we talk to employers about this, it makes a lot of sense. I mean, there are very few employers we talk to who think this is kind of a crazy idea, but the big dilemma for a lot of employers is just that they are very proud of what they've built. Many employers have spent lots of time doing all the right things, and they really do provide a governance process for their current programs, and they're diligent about that and they care about outcomes for employees. And so, this idea of turning the keys over to someone else, at least that's the way they describe it or see it, is nerve wracking for them. And what we would say is think about what you want to control. And you can control those things when you join a multi-employer arrangement.

You can still control the plan design, you can still control vesting provisions, decide how much money to put in people's accounts, all of those things are still in your control as an employer. But then once you've made those decisions and you've designed that program, what you don't really want to control is all the other stuff that comes along with it,  You need to spend your time running the business. And so, I would say Rick talked about PEPs for small employers and PEPs for large employers here in the U.S. Not all PEPs are the same. Not all master trusts are the same. Investigate the market, pick the one that's right for you. But I really do think if you're an employer, when you dig into this, you will be able to control the things that you want to control and you'll be able to outsource the things that, frankly, you'd rather have somebody else do, because they'd probably do it better.

Jennifer Brasher:
Right. So, your comments there, Byron, are a great segue to our next question, which is what kinds of internal challenges are organizations facing with retirement plans? Tony, let's start with you on this question.

Tony Pugh:
Sure thing. Thanks, Jennifer. Well, it's pretty tough being an employer at the moment, isn't it? I mean, beyond pensions, we know that all the employers that we're working with are dealing with a whole wide range of challenges that add up to somewhat of a perfect storm. So, if you think about the backdrop of dealing with new working models in the light of COVID, adapting to deal with climate change, supply chain issues, economic challenges all around the world, then the companies that we are dealing with are frankly busier than ever. And if you bring it a little bit closer home to pensions, we also know that a very large number of the employers that we're working with are prioritizing resources to deal with managing their DB pension liabilities because of the impact they have on the business. So, what that in turn is meaning is that there's limited bandwidth and resources to focus on important issues such as managing an employee's DC pension provision, despite the significant increase in regulation that I was highlighting earlier.

So, lots of dynamics going on then, but bringing it to DC pensions more specifically, and using that 2022 Aon DC survey from the UK, we know from that, that 27 percent of employers are looking to change their pension provision due to the concerns they have over governance and compliance requirements and falling foul unwittingly of legislative requirements. And then we've got another 25 percent that are looking to achieve better value for their employees. That's great. So, that's a positive reason why some employers are prioritizing looking at multi-employer solutions.

And then the last number, 38 percent who are looking to change their pension provision, their DC pension provision, due to a combination of cost and resource limitations, which ties right back into those other issues that I was talking about at the beginning there. Employers have got a lot on their plate. And so as to what Byron was saying, do they really need to be dealing with compliance-type issues around their pension as well? So, that adds up to massive level of significant challenges to employers of all shapes and size, and that's just another point that I wanted to make that we've certainly seen develop in the UK and Ireland, is that it's both large and small employers that are facing up to these challenges and looking to multi-employer master trust type solutions as the solution.

Jennifer Brasher:
Great. Thank you, Tony. Rick, anything that you would want to add in terms of what kind of internal challenges employers are facing with retirement plans?

Rick Jones:
Tony had some great statistics and sites, and we've got similar ones in the U.S., which I won't go through specifically, but let me offer one very recent case study, which is the SECURE 2.0 legislation here in the U.S, over 90 provisions that employers need to deal with, many of them related to their 401(k) and 403(b) plans. Again, just an awful lot of work involved in working through that and deciding how and what to embed in your plan and at the right time. So, just a lot of compliance and design and other strategic decisions that go along with that. We're helping clients in the PEP really work through that, and as they further outsource those responsibilities to us, we give them the options that they need, but also the bandwidth is created for them to further focus on their core business rather than those 90-plus provisions.

Jennifer Brasher:
Great. Thanks, Rick. Byron, anything you'd want to add?

Byron Beebe:
Yeah, maybe the last thing I would add is there's maybe some more people that are sort of asking this question around how do we administer or govern our defined contribution plan? And those aren't just HR and finance leaders anymore. I think legal and risk managers are asking that question as well. So, in the U.S., we're starting to see an increase in premiums for director and officers’ liabilities. And I do think a lot of employers are really just asking, why are we doing this internally? What risks do we take on if we keep this responsibility internally? And I do think that's a good question for employers to ask themselves. We should want to provide retirement accounts to people in the best way possible while taking on the least amount of risk for our organization as possible. And I think that's another lens that employers are starting to look at internally.

Jennifer Brasher:
Right. Well, thank you all for your great answers on that question. Let's go to the next one. How should an organization evaluate whether a pooled solution like a PEP or a master trust is appropriate for their employees, as this is an employer decision, and how is this different for larger and smaller companies? And I know we've hit on this a little bit in terms of pooled plans for larger versus smaller employees. So, Tony, why don't you go ahead and start with this one as well.

Tony Pugh:
Yeah, of course. Of course. Yeah, it's a good question, and you won't be surprised to know that based on what I've said earlier, it's on the table for most employers with their own bespoke arrangement right now to do some sort of evaluation. And that's obviously a very important piece of work. And in my view, it starts with employers really understanding and investigating what their objectives are and their priorities are in providing a DC pension plan in the first place. And once an employer is absolutely clear on their priorities and objectives, then they're in a better position to start assessing whether the current arrangement is actually meeting those objectives. And we often find that it isn't. So, it's a valuable piece of work to do before embarking on a change exercise.

What we're seeing in the UK is that there are some, but very few employers that may have the resources and the skillset to do their own evaluation and then if needs be, to then look at the market to find a better solution for their employees. But the vast majority of employers that we're working with are using professional advisors to help them both evaluate their objectives and then as they, if needs be, review the available providers in the market to find one that best fits the individual employer needs. And we see that approach in the UK and Ireland as almost universal now, so using a professional advisor to help with that evaluation piece. And that helps ensure that the company considers the right issues, ensures that professional evaluation of the options is done. And I think that's absolutely appropriate when it comes to something as important as reviewing your employee's pension arrangement.

So, turning to your second question there, Jennifer, in terms of does that differ by size of client? Absolutely not. I think it doesn't really matter whether you're a 50- or 100-life employer or a 10,000-life employer, the pension arrangement is very, very important. So, taking professional advice, taking your time and doing the objective assessment and market review piece properly is essential. And if I put that into context of the reality of our world, at the moment, for the Aon master trust, we're providing terms for companies with a scheme of £50 million, all the way up to companies with well over £1 billion pounds in DC pension assets. So, all of those employers that have come to us to provide their pension and provide quotes, they are all taking advice from professional evaluators.

Jennifer Brasher:
Great. Thank you, Tony. So, Rick, just kind of repeat the question again, how should organizations evaluate whether a pooled solution is appropriate for their employees, and is that different for larger and smaller? So, what are your thoughts?

Rick Jones:
I'd say at a high level, an organization should look at the cost to deliver a competitive and comprehensive benefit, and look at the efficiencies in different structures, including PEPs. We think that the opportunity cost can be huge, whether it's the cost to manage the program or the risk assumed in doing so, and really, the cost to participants with the opportunity to improve their retirement outcomes. The third-party evaluator market in the U.S. is just starting to develop, so those organizations are available to help organizations through the process. But back to your question specifically about large versus small, Jennifer, we really view it as a cost versus risk equation no matter how large the organization is. And we think that the analysis is relevant, really, at any end of the market.

Jennifer Brasher:
Great. And I know we've seen pricing and savings of the same levels for smaller and larger organizations. I know we've seen that across the board, Rick.

Rick Jones:
Absolutely.

Jennifer Brasher:
Byron, anything you want to add to this?

Byron Beebe:
Yeah, we've talked about cost savings here a couple times, but I would say when you're doing this evaluation, it isn't just about costs. I think that is an important point. And I do think the level of cost savings might be different between large employers and small employers, but really, the evaluation of which master trust or PEP to join has to look at the features of the trust, how employers are going to be cared for, what kinds of enhancements or features would be offered to employees once an employer joins a master trust or a PEP. All of those things are really, really important, in addition to the cost. So, cost is one component of it and certainly an important point, but it's not the only part to consider.

Jennifer Brasher:
Thank you for that, Byron. Okay, let's move on to our last question. How will these decisions affect the future of an organization's retirement benefits and impact participants? Byron, let's start with you on this one.

Byron Beebe:
Yeah, we work with a lot of employers, many of whom are multinational employers who are trying to get their arms around the retirement programs they have around the world. And that certainly is a difficult challenge. And I think as more and more employers adopt these master trusts, I do think that's going to give employers a lot more comfort that there are experts managing the programs. Certainly, you don't join a master trust or PEP and stay in there forever. I think you continue to do evaluation and get help with those evaluations over time, but you can certainly rest easier to know that you're in a program with a lot of other employers, and the governance that's being provided by these outside providers, these master trusts and PEPs, really is a thorough process. It's a process that's designed to provide the best outcome for your employees if they're in those programs.

So, I do think it's going to help employers just get more comfortable with the programs that they're running around the world. I also think that over time, that's going to allow HR staff to focus on things that are most important for running the business. We don't necessarily think employers eliminate staff. Some may, but more likely, I think, is employers have been telling us they've got a lean staff to do all the things that they need to do, and certainly the pandemic and lots of other things have added to the HR team's plate. So, in order to take the HR team and have them focus on more important areas, some of this administrivia can come off their plates and really allow them to be more efficient with their time internally, and I think that'll help employers just manage their staff better. And the last thing is just about participants.

I really do think they are going to be better outcomes here. I think participants will get comfortable with these programs. Really, you've got large investment providers and record keepers sort of marrying together to provide these solutions, and those solutions will continue to develop. And we said before, we do believe that there's some advantage in scale, and the more scale you have, you can bring more efficiencies and more solutions to market faster. I think employees will benefit from that. They'll find it's really easy to use these programs. They're going to get a lot more sort of financial wellbeing counseling along the way. And I think that ultimately, that'll be better outcomes for employees. So, I think there's something in this for everybody.

Jennifer Brasher:
Great. Thank you, Byron. Rick, anything to add?

Rick Jones:
I think that we've got proof of concept here. We've got proof of concept globally that these master trusts or pooled solutions work, and the U.S. Congress endorsed it for 401(k) plans and then three years later, they endorsed it for 403(b) plans. So, it's playing out as we anticipated globally and locally here in the U.S., And as we've made the point repeatedly, this will only improve outcomes for individual retirees and improve American businesses.

Jennifer Brasher:
Great. Tony, any last comments from you?

Tony Pugh:
Sure. Okay, yeah. Can I just pose a little slightly different perspective in that the trend towards multi-employer master trusts arrangements has been happening in the UK for seven or eight years now, so an awful lot of clients have moved, both large and small, into the master trust space, and I'm not aware of any that have moved back the other way? So, I think that's quite telling in that those that have moved to master trusts have found that this worked for their business, and therefore they're staying with it as a solution for their employees.

And in finer terms, if we narrow it down a little bit to the Aon master trust in the UK, we did a survey of all our employers in the master trusts last year, and they rated their experiences and the service levels over 9 out of 10. So, those are really high scores, but reflecting on the type of service that you can and rightfully should expect from a master trust type of arrangement. And that good service is super important because it also directly impacts the members who are more important, let's face it, than any other party when it comes to DC. So, the members have access to new services that are integrated with the master trust, they have different investment options, and due to the scale that we have, we've been able to, for all of our clients and all of their members, put in a position where they are actually paying less than they were under their previous arrangement and having access to a wider range of services.

Jennifer Brasher:
I agree with you, Tony. Thank you all for joining us today. That's our show, and we thank you all for listening and look for the next episode of On Aon coming soon.