DC trustees and employers in the dark about member outcomes
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UK pension schemes have an "adequacy blind spot" as almost three-quarters of employers and trustees do not know the expected outcome for a typical lifetime member of their defined contribution plan, a new survey has found.
Aon's 'DC pension and financial wellbeing survey', covering organisations responsible for around £98bn of DC assets and more than 1.2m savers, suggests 73% of respondents do not know the expected retirement outcome for a typical lifetime member. The findings put a spotlight on adequacy failures in DC as the government awaits the recommendations of the Pensions Commission.
Among those that do have an outcome target, 22% reference the Retirement Living Standards. Just 4% refer to a replacement salary ratio.
The survey found that median employer contribution rates have remained stable, at about 6% of salary, though Aon says there is a wide range.
Associate partner Steven Leigh said: “Employers and trustees need first to understand the retirement outcomes their current design is likely to deliver, identify where different groups may be falling behind, and then consider how defaults, matching and engagement can work together to improve long-term member outcomes.”
Adequacy does not even enter the equation for many employers. Fewer than a quarter (23%) of respondents said their approach to pension provision is to design a plan to provide sufficient funds for employees to retire at a reasonable age. Instead, the majority (53%) said they aim to align benefits with what is offered by competitors (53%).
In addition, just 14% measure returns against tailored objectives for their DC members. Fewer than a third (28%) monitor aggregate returns experienced by default members, while 22% did not know how default performance is monitored. More than half (56%) say they simply monitor returns of the component funds versus benchmarks.
"Alongside contributions, investment returns are one of the most important drivers of retirement outcomes. But our survey found that relatively few organisations – less than a third - are assessing the returns of their default investment strategy in aggregate," said Kath Patel, associate partner.
“It is crucial that employers and trustees consider investments more holistically and test two things together – whether savings rates and the default investment returns combined are delivering what members need for a decent income in retirement."
Was the attraction of DC that outcomes would be someone else's problem?
