UK defined contribution (DC) pension schemes are struggling to find the right form of measurement to assess their effectiveness, according to Aon’s latest survey, How do you Measure up? UK Defined Contribution Pension Survey 2020.
The study, which looked at more than 200 UK DC schemes, covering more than half a million members and £50bn (€59.5bn) in assets, showed 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.
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.”
Key findings include:
- More schemes aim to benchmark contribution rates against thier peers, 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.
Foster said it is essential to “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”.
He added, however, that at the moment “we feel that the measurement process is rather hit and miss and doesn’t actively demonstrate value”.
Jo Sharples, partner and head of DC investment proposition at Aon, believes there could be value in moving into a master trust structure.
“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,” she said.
She added: “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.”
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.”
Aon is 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, he explained.
“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,” he said.