Auto-enrolment commenced ten years ago, and many employers amended or replaced their defined contribution (DC) pension arrangements at that time. Since then, there have been numerous changes to DC provision, such that many of these solutions are starting to look dated. Financial wellbeing, inclusion and diversity, ESG, the PLSA’s Retirement Livings Standards and the emergence of master trust plans have all since emerged as important drivers of DC design.
We rarely come across an employer where the aspirational design equals the current arrangement.”
So, employers are faced with the question as to whether their DC pension arrangement remains fit for purpose. But how do you answer that given the multitude of different factors that must be considered in assessing whether your DC pension arrangement is right for the next ten years?
Whilst auto-enrolment has increased take up of pension provision, the focus of many has now turned to retirement adequacy and ensuring employees have a retirement aligned to their expectations.
Coupled with this is the new ‘war for talent’ amongst employers and the need to provide a benefits package to attract and retain key talent. Given that, employers should ensure contribution rates are compliant, aligned to the market and its peer group.
Our survey findings show that half of employees believe that their employers should offer tools that provide guidance on how employees can improve their financial situation.
There is also a trend from providing information and written materials to more human interaction with the use of supporting technology. In addition to this there is also an increasing appetite to broaden this out to include webinars and financial counselling or guidance.
There continues to be a strong focus on integrating environmental, social and governance (ESG) factors into investment strategies from employers and employees alike. Investment managers and providers continue to develop investment strategies that encompass ESG and therefore employers (and potentially trustees) should evaluate their current investment options and whether change is needed.
Employee benefit programmes play an important role, but there can be disconnect between employee needs and how effective traditional benefit solutions are. Employers should evaluate their DC arrangements to ensure they are inclusive to all with regards to contribution design, fund options and communications provided. Does a 25 year old really value a matched contribution into pension or instead prefer a solution that assists with short to medium term saving requirements?
Our recent survey shows 8 in 10 organisations are looking to put in place a financial wellbeing strategy which the DC arrangement will form part of. As part of this, nearly half of employers are looking to put in place wider saving options alongside the DC arrangement in the next two years in order to provide further flexibility to employees.
Employers should consider assessing employees’ financial priorities via surveys and focus groups to ensure the benefits offered is in line with employees’ requirements.
As governance requirements have grown in recent years, many employers are evaluating their current DC vehicle and noting the Regulator’s push towards consolidation into Master Trust arrangements. As part of this, employers should consider whether their current DC arrangement is sustainable given this rapid market shift.
Given the sheer amount to consider, we often see some employers defer any review or alternatively consider only one aspect of their DC pension arrangement, rather than a holistic view across all areas.
In order to support and provide new perspectives to employers, we have developed our interactive DC Direction framework which helps employers (and trustees) consider all aspects of their DC and broader savings plans in order to assess whether it continues to meet the employer’s and employees’ needs ten years on.
The tool helps to assess the current arrangement using our propriety data and market research and then identifies what the aspiration design might then look like. We rarely come across an employer where the aspirational design equals the current arrangement. The only constant is change!
For more information on the changing DC landscape and DC Direction please contact Jayesh Patel.