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DC landscape 'confusing' and contradictory - Fidelity

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  • DC landscape 'confusing' and contradictory - Fidelity

UK - The provision of defined contribution (DC) pensions is confusing as decisions are made by 'rule of thumb' or 'received wisdom' leading to contradictions, Fidelity has claimed.

Findings of its report 'Corporate Commitment to Pension Provision' revealed around 40% of firms now operate at least one trust-based DC scheme, a slight increase from 2006.

A survey of senior executives, from 100 large UK firms and with pension assets of £110bn (€ 143bn), showed 70% have opted to implement a trust-based DC as it "fits" with existing DB arrangements, although Fidelity pointed out if employers could start from scratch 60% would prefer a contract-based scheme such as a stakeholder or group personal pension (GPP).

In addition, the research revealed for 60% of firms the second most important factor in choosing a trust-based DC is continuing control over design issues such as fund choice and administration.

However, the findings showed only a quarter of trustees annually review investment options, and just one-fifth considering investment choices every three years, while more than half of trustees of schemes managed by respondents only review investments on an "ad hoc" basis.

The report also confirmed 71% of all firms with a default fund in their DC scheme use a passively-managed fund, and of these 69% have implemented a lifestyling strategy, which Fidelity said does not suggest "control over fund choice is resulting in a particularly interventionist approach to investment strategy".

Around 43% of respondents claimed this approach offered a low perceived risk, however, in contrast, 42% of firms claimed the most important factor when choosing investments is the potential for outperformance.

As a result, Fidelity said the "picture painted by our research is one of confusion" as the findings suggested "decisions are made by rules of thumb and in accordance with received wisdom".

"This leads to contradictions such as the use of trust-based DC provision to enable greater control, but control not being exercised; or a desire to beat the market mixed with the choice of passive funds to minimise risks," the report added.

The report also highlighted issues surrounding the proposed implementation of personal accounts in 2012, as the findings suggest 80% of firms will ultimately need to take some action on their pension arrangements, but 62% have not made any plans and 10% appear to be unaware of the concept of personal accounts.

That said, despite this lack of action, Fidelity revealed the "vast majority" of respondents had an idea of how to react to the new pension regime, with 7% intending to close their existing DB and DC arrangements and introducing personal accounts.

Fidelity estimates this would equate to 300,000 employees would lose their current provision, while a further 11% of firms suggested they would close existing schemes to new employees, who would then be auto-enrolled into personal accounts.

Simon Fraser, president of investment solutions group at Fidelity International, said the figures appear to support the argument personal accounts would encourage 'levelling down' so the government's original intention to introduce a new regime which would "complement rather than compete" with existing provision "will not be the case".

He pointed out there is "clearly some confusion" for companies not knowing what to do next, as they "see value in pension schemes but need to find a way to control risks at the same time".

"If firms continue to reduce their level of involvement with their employees' retirement and employees do not start to take responsibility for themselves then the strain faced by the state will be significant. The government should show greater flexibility in the personal accounts model to ensure that good quality schemes are protected," he warned.

But Mike O'Brien, minister for pension reform, responded by arguing: "These reforms will result in up to nine million people newly saving or saving more. For them, this is 'levelling up'. For the more than one million people in workplace pension schemes who are currently getting nothing or less than 3% from their employer it will be levelling up too."

"But we are not complacent and will continue to work with employers and the pensions industry to guard against levelling down," he added.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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