UK DC schemes find assessing their own effectiveness a challenge
LONDON (18 February 2020) – Aon, a leading global professional services firm providing a broad range of risk, retirement and health solutions, has published ‘How do you measure up? UK Defined Contribution Pension Survey2020’. This new survey of over 200 UK defined contribution (DC) schemes, covering more than half a million members and £50 billion in assets, shows that schemes are struggling to find the right form of measurement to assess the effectiveness of various key aspects of their DC schemes.
The survey found that respondents want to offer competitive, ‘good value’ DC schemes – with most wanting to do more than the minimum level required - but many are not measuring whether they are succeeding in meeting their objectives.
Key findings include:
- More schemes aim to benchmark contribution rates against peers (other schemes) than aim to deliver sufficient funds for employees to retire
- One in three schemes do not measure progress against their objectives
- 65% of respondents do not know the projected outcome for a typical pension scheme member
- Just 25% of employers consider pension outcomes in the context of future workforce planning
- One in three trust-based and one in five contract-based schemes plan to move to a master trust structure in the next five years
- 65% of respondents said they would like to spend more time communicating with employees on pensions
John Foster, principal consultant at Aon, said:
"While it’s right that there has been a strong focus on what is being paid into DC schemes, it’s vital that the focus is not just on the short term but just as strong on what the outcome will be. We have been actively helping sponsors and trustees of DC schemes to set objectives aligned to individual member needs as well as meeting the employer's strategic goals.
“It is key to then make sure that there are robust measures in place to be able to check progress against these objectives and to identify where resources can be best focused. However, at present we feel that the measurement process is rather hit and miss and doesn’t actively demonstrate value.”
Delegation
One clear message coming through the survey was around the trend for schemes to delegate in different forms. While over a third of schemes do not delegate any investment decision-making responsibility to a third-party investment professional, one in six trust-based schemes expect to delegate more over the next three years.
However, reflecting the trend shown in Aon’s 2017 DC survey, and following master trust authorisation last year, we continue to see a trend to increase delegation, with more schemes likely to move to a master trust structure in the next five years.
Jo Sharples, partner and head of DC Investment proposition at Aon, said: "Many schemes are moving to a master trust structure to help with their aim of delivering better member outcomes. We believe that this could help them to free up time and resource to focus on retirement adequacy or for the master trust providers themselves to pick up on the adequacy challenge.
“Either way, it is imperative that those running pension schemes understand the areas where they can really add value and which areas could better be delivered through a professional third party. With many of the schemes we have seen moving to The Aon MasterTrust, it is clear they are looking to offer their members high quality multi-channel communications and sophisticated investment solutions that they are just not able to provide under their existing model."
A comfortable retirement?
The survey found that 32% of schemes currently communicate targets to help employees plan for a comfortable level of savings for retirement, while wider financial wellbeing support - to help employees understand how pensions fit in to their overall wealth - is becoming widespread. Even so, schemes are not good at measuring whether employees engage with this, or in measuring its effectiveness.
The recent launch by the Pensions & Lifetime Savings Association (PLSA) of its Retirement Living Standards, has highlighted the progress that many DC schemes need to make, and it is generally clear that the industry has a long way to go to reach the PLSA’s aim of 90% of schemes using targets to help members understand how much they need to fund their retirement.
Steven Leigh, senior consultant at Aon, said:
“The PLSA’s Retirement Living Standards is a great initiative to get people thinking about how much they really need to be able to retire in the way and at the time they would choose. However, it also important to remember that a DC pension will not be the only source of income in retirement for most.
“We are working with schemes to help their members understand the entirety of their likely retirement wealth, which could include the state pension, pensions from previous employment and other savings so that they can see how much they will actually need to aim for from their current DC scheme.
“The forthcoming pensions dashboard could provide an industry-wide solution for the pensions savings aspect, but until then the onus is on individual schemes or employers to provide an holistic view of likely income in retirement.”
About Aon
Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance.
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