UK - The majority of defined contribution (DC) fiduciaries, such as trustee boards or monitoring committees, claim they are forced to focus on the administrative side of scheme governance rather than qualitative activities such as investment strategy, according to a study conducted by Watson Wyatt.
Findings from the consulting firm's study of 60 UK and Irish companies on 'The future of DC governance', suggested 90% believed good governance helps manage risks faced by fiduciaries, sponsors and members.
However, the research also showed fiduciaries - a group or body responsible for plan governance - spend the "vast majority of their time" on operational governance, such as administration and the monitoring of providers.
Watson Wyatt claimed the study indicated trustee boards instead want to focus on 'qualitative' governance, including identifying and managing risks, investment strategy and member communication, as 80% believed retirement income can be improved by good DC governance.
The findings revealed respondents also felt improved governance can add most value in areas relating to investment and member engagement or communication, particularly as they suggested these were the two areas with most risk exposure.
However, Watson Wyatt said the research showed the main constraints to improving governance is a "shortage of time, inefficient structures or processes and a lack of expertise", although the respondents also identified the continual flow of legislative and regulatory changes and more focus on defined benefit (DB) schemes as two further barriers to progress.
Gary Smith, senior consultant at Watson Wyatt, said: "Fiduciaries believe they should be doing more to help DC members and clearly want to focus more on qualitative approaches. There is an acknowledgement that added value and risk management are the two main factors focusing their minds when prioritising the allocation of scarce resources."
The consulting firm said DC assets will start to exceed DB assets in the UK in the near future and DC members will outnumber those in final salary arrangements, so it is right to allocate "appropriate resources" to the governance of DC schemes to ensure members get the best value possible.
Smith agreed that "investment is the area where good governance can add the most value and where members struggle most", and suggested there was a growing sentiment among trustee respondents that DC sub-committees should be formed to run separate meetings, particularly if the DC section is part of a hybrid scheme.
That said, he warned trustees should avoid "confusion of endeavour", where time is allocated to areas of perceived importance, such as monitoring managers, at the expense of real value-adding work, such as getting the default fund right.
"My sense is that many fiduciaries are now prioritising good governance as they become aware of the benefits of getting it right and the risks, to a growing number of members, of getting it wrong," added Smith.
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