UK – Defined contribution (DC) scheme managers need to be aware of the challenges that lie ahead with the upcoming auto-enrolment process and should provide a variety of alternative investment fund structures while maintaining transparent on scheme charges, Mercer has warned.
Releasing a watch-list of 10 challenges facing companies involved in the auto-enrolment process, the consultancy argued that, with ongoing market volatility and more regulatory changes on the horizon, DC scheme sponsors, trustees and governance committees should be fully prepared for the move into auto-enrolment.
According to Paul Macro, partner in Mercer's DC business, implementing auto-enrolment will be a focus for many organisations in 2013, and meeting deadlines will be a challenge for many.
"Sponsors and trustees will have to grapple with the practicalities of selecting and implementing appropriate DC providers," he said.
"Companies should offer value for money to their pension scheme members, but backing a scheme solely on the basis of cheap fees will not deliver the returns pensioners expect."
Mercer added in its recommendations that employers should weigh up cost and overall service quality with "great care" when considering a new pension scheme or changes to an existing one.
According to the consultancy, companies may opt for one with minimal administration or investment charges, but to ensure employee buy-in, the scheme must provide the level of service and investment returns expected by the membership.
However, Mercer warned that this option might not be possible with schemes operating at bargain basement rates.
Additionally, Mercer called on DC scheme managers to adopt a "smart" governance structure, as the Pensions Regulator's focus on DC governance is set to increase.
Mercer went on to point out that scheme members have differing levels of financial knowledge, so different investment approaches should be made available to fit their needs.
"Those that don't choose the default fund find that access to a focused range of funds, categorised by risk rather than asset class, is preferable," the consultancy said.
"This approach also provides the flexibility to enable trustees or scheme providers to change asset allocation and fund managers quickly in response to market changes."
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