Mercers claims DC management practices are lacking

GLOBAL- Management practices in defined contribution retirement schemes are not meeting employer and employee expectations according to a global survey conducted by Mercer Global Human Resource Consulting.

1,655 organisations across 10 countries were interviewed revealing wide variations in the development of DC schemes between countries, and weaknesses in the monitoring of benefit adequacy, qualitative review of investment managers, service standards for administration, and member education.

"The vast majority of defined benefit plans have a rigorous management programme in place. But many defined contribution plans, while fulfilling the regulatory standards, fall short of meeting the expectations of members and sponsors. Failure to have an effective management regime could leave plan sponsors exposed to legal challenge and damage to their reputation", says Jonathan Gainsford, European Partner at Mercer.

In Canada, the UK and Ireland, almost half those surveyed admitted to not reviewing the adequacy of benefits, or reviewing less than every three years, compared to 28% in the US.

Frequency of investment reviews was similarly varied. Although 90% of respondents said they review investment performance annually, frequency of reviews of qualitative factors, which, say Mercer, are likely to drive future performance, differed greatly. Only 30% of UK participants conduct annual qualitative reviews of their investment managers, compared to 48% for Ireland and 75% in the US.

"With the downturn in investment markets, organisations should be reviewing their investment managers’ strengths and weaknesses and the projected adequacy of benefits to ensure their plans continue to be on track. If not, as a minimum they should communicate the change in expectations to employees so they can decide whether or not to increase their contributions. Without this action, employees will have unrealistic expectations that ultimately present a risk to the sponsor", warns Gainsford.

Employers could end up facing claims for compensation reveals the survey, due to a lack of service standards with their scheme administrators. As many as 70% in Ireland, and around 50% in the UK and US did not have service standards in place, which could mean they are receiving late or inaccurate information at no fault of the employee.

A correlation between education of employees and success of a DC scheme was also apparent. Organisations that considered their plans as highly successful are more than twice as likely to have an educational approach to member communication than those rating them as only somewhat successful, yet only 29% of interviewees currently provide investment advice to employees. 27% are considering offering advice, while 44% indicate they do not intend to offer it at all.

Says Gainsford: “in moving from defined benefit to defined contribution plans, employers are passing the financial risks onto employees. In doing so, they should ensure employees clearly understand the implications of this and are well equipped to make suitable choices. Successful DC plans implement communication programmes that go beyond providing information, and offer genuine education."

The survey also shows that successful schemes are more likely to have a disciplined approach to managing and monitoring their scheme, yet only half of the respondents have a written policy setting out the goals and objectives of their DC plan.

Have your say

You must sign in to make a comment


Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2563

    Asset class: Mid & Small Cap Equities.
    Asset region: Global.
    Size: USD $130m.
    Closing date: 2019-09-27.

  • QN-2564

    Asset class: Large Cap Growth Equities.
    Asset region: Global Developed Markets.
    Size: USD $130m.
    Closing date: 2019-10-04.

  • DS-2567

    Closing date: 2019-10-02.

  • QN-2569

    Asset class: Local Currency Bonds.
    Asset region: Global Emerging Markets.
    Size: $500m.
    Closing date: 2019-10-10.

Begin Your Search Here