When you’re looking at your global retirement portfolio, how can you ensure your local defined contribution (DC) plans offer good value for money?
Optimizing defined contribution outcomes
MICHAEL BROUGH: Develop DC markets, as in the US or parts of Western Europe, have very well established systems that have accumulated scale in terms of assets, but also in terms of membership headcount. These systems offer wide investment choices to employees, fiduciaries and sponsors. They may offer lifestyle de-risking strategies. And the large scale, allows relatively low or capped institutional fees and charges.
At the other end of the spectrum, we see DC plans in the developing world, brand new DC structures, either just established or about to be introduced. They have no scale of assets, they have no or very limited provider markets, no investment choices or lifestyles, few or no members yet and high sometimes very excessive initial costs.
In between these extremes, we see a very wide range in terms of size and maturity of DC options, investment choices, levels of fees, and charges and the sophistication of the administration service.
Bear in mind that member outcomes depend on a multitude of different factors. So, not just limited to your investment portfolios. It's essential that your governance arrangements take account of the full range of nuances across the DC world, in order to understand what outcomes your global DC plans are delivering to members.
The overall remit might include plan design. So in order to deliver good outcomes to members, you need to know what you're offering in each DC market, and to understand the impact of local market conditions. You'll also need to understand or consider contribution rates, vesting periods, withdrawal and distribution practices and outcomes. As well as an understanding of the state and mandatory programs that are in place.
As well as that there's local or government, or global investment strategies that need to be considered around choice where possible, and defaults if available. But also lifestyle options were offered, and so on. The appropriate default option will depend on the local market, but also on the level of engagement from your employees. You'll also need to consider whether your investment strategy is robust enough to deliver good outcomes to members in varying economic scenarios.
There's also support for employees, to ensure understanding and good decision-making. This would include investment decisions, but also broader decisions, such as contribution rates or optional benefits at retirement. There's also administration. So for example, to ensure your employees contributions are invested in a timely manner, and benefits are paid correctly and also in time. And there's ongoing monitoring, which includes investment administration and communication performance. As well as ensuring fees and charges are reasonable and regulated reviewed.
So effective DC governance enables an oversight committee to anticipate market changes, and also to act fast when world economic events occur, such as rising inflation, climate change, pandemics or geopolitical risks. In order to protect and improve financial outcomes for your employees.