LONDON, September 18, 2023 – In the past decade, average charges for defined contribution pension (DC) schemes in the UK have fallen by 20%, from 41 basis points (bps) in 2014, to 33 bps today, according to WTW’s latest Defined Contribution Pensions and Savings report. This has been driven by the growth in DC assets, more frequent provider reviews and increased master trust provision in the DC market, encouraging fee negotiations based on larger scale.
However, having achieved these savings over the past ten years, pension schemes are now reluctant to reverse the gains and accept higher fees in return for greater emphasis on Environmental, Social and Governance (ESG) investments or access to diversified asset classes.
The research found that only a quarter (26%) of schemes are willing to trade-off higher charges for increased access to illiquid assets and private markets. Similarly, just a quarter (25%) of schemes are interested in enhancing their investment in ESG strategies if it means higher fees. The remainder were reluctant to do so or, simply, did not know if it was the right thing to do.
Recent Government pension proposals, known collectively as the ‘Mansion House Reforms’ are encouraging DC schemes to invest in more expensive but potentially higher growth assets, such as unlisted equities, private markets and illiquid assets.
“While it’s great news that DC schemes have successfully negotiated down fees over the past decade, in reality we know from our research that these modest gains do not alone provide a significant boost to average pot sizes for members,” said Gemma Burrows, director in WTW’s retirement business.
“The opportunity to invest in more diverse asset classes, that were previously unavailable to DC savers, should not be automatically dismissed on the basis of fees.”
Gemma Burrows | WTW
“The opportunity to invest in more diverse asset classes, that were previously unavailable to DC savers, is something that should not be automatically dismissed on the basis of fees if, ultimately, they could provide better member outcomes. Scale and innovation are needed quickly in this area and careful selection of investment strategies, asset managers and funds will be a key part of the decision.”
The report also found that, despite most default investment strategies now targeting drawdown rather than annuity purchase at retirement, over a third (34%) of single employer trusts still don’t provide members with access to a drawdown arrangement.
Burrows said: “There are several benefits for members to providing access to drawdown at retirement. It avoids members having to navigate the complex provider market to find drawdown provision themselves, provides an opportunity for this provision to be provided within a trust environment giving the added benefit of trustee oversight, and trustees should also be able to appoint a provider that offers good value and quality of service. Importantly, offering this option does not restrict savers choice and ability to find a solution for themselves.
“Trustees have been concerned about the risk of appointing third party providers in the past due to this being deemed as advice, however doing nothing should be considered a greater risk and with the Governments recent consultation focussing on retirement products and services, the direction of travel is clear.
“Providing access to drawdown can also be used to allow members to stay within their existing pension plan if they wish. This means they can keep their existing investments and maintain trustee oversight, rather than having to transfer to a different provider, with the risk of higher fees and no protection from trustees.”
Another growing area of interest for employers, industry and regulators is in the area of inclusion and diversity (I&D). For DC pension schemes, this includes a focus on the Gender Pensions Gap – the difference in retirement savings between men and women at the point of retirement – which the Department for Work and Pensions has estimated to be at around 35%.
The report found that nearly half (45%) of schemes are intending to address their gender pensions gap in the near future. However, to date, only 8% of DC schemes have taken measures to tackle retirement gaps between different demographic groups within the workforce.
“There are a range of factors that are within the power of DC schemes to do to help improve equality of outcomes in retirement,” said Burrows. “The first step is actually finding out if there is a gender pensions gap or other disparities between groups within the scheme, and the extent of it. By collating and segmenting a scheme’s data it’s possible to understand the outcomes for each group, identify any gaps and see which areas to focus on.”
“Once established then targeted action can be agreed. High quality financial education and guidance, can also be an effective action that DC schemes can take to help redress the imbalance.”
WTW’s 18th annual Defined Contribution and Savings Survey 2023 contains data on 122 FTSE 350 companies and 140 other leading UK employers.
At WTW (NASDAQ: WTW), we provide data-driven, insight-led solutions in the areas of people, risk and capital. Leveraging the global view and local expertise of our colleagues serving 140 countries and markets, we help organizations sharpen their strategy, enhance organizational resilience, motivate their workforce and maximize performance.
Working shoulder to shoulder with our clients, we uncover opportunities for sustainable success—and provide perspective that moves you.
