How to de-risk your scheme

A new Mercer initiative is helping defined benefit (DB) schemes identify effective de-risking opportunities, as Foresight reports.

Many DB schemes continue to grapple with unparalleled and unpredictable funding levels. The Mercer Dynamic De-Risking Solution (MDDS) has extended the implemented consulting service offered by Mercer, and examines the funding of the scheme and opportunities to de-risk.

“This is an innovative venture which takes a more complete view of the client situation than anything else that is out there at the moment,” affirms Alan Baker, principal, Mercer.

“Mercer typically works with clients with scheme assets between £50m and £500m, agreeing a route map based on their desired funding target and timescale,” Alan explains. “We invest their assets in a series of funds which are monitored on a daily basis as is the scheme’s overall funding level. When the latter improves and there is an opportunity to remove some risk, we will do it.”

Thus, MDDS avoids the common problem of opportunities being missed due to the protracted nature of trustee processes. Applying Mercer’s best practice, the MDDS model locks in favourable movements in the market, based on pre-determined parameters. The client is provided with updates and reports outlining how the funding has changed and explaining any actions taken, all in a straightforward package.

If you would like a demonstration of MDDS, please contact your Mercer consultant or e-mail  Mercer Foresight 

Spotlight on DC: Mercer’s 2009 Global Survey

In the UK 354 companies from 19 industry sectors participated in the survey, representing 1.2 million members. It is clear that DC is now the dominant approach for workplace pension provision in the UK. The most important reasons for establishing a DC plan in the UK were related to reducing cost volatility (58 percent) and reducing overall costs (49 percent).

Design, contribution rates and structures

Given the economic environment it is encouraging that 92 percent of employers have decided not to make any changes to DC contributions in the near future.

There has been an increase in average contributions paid since Mercer undertook a UK DC Survey in 2007. Average employer contributions have increased to 7.24 percent (6.8 percent in 2007). For members, the average contribution (excluding unmatched voluntary contributions) has increased to 4.63 percent (3.6 percent in 2007). This is an encouraging move in the right direction, however, further savings will still be required to give most a reasonable level of retirement benefit.

28 percent of participants offer a flat–rate contribution structure, while 54 percent offer a “matching“ approach and 25 percent operate an age-related scale. 89 percent of DC plans are contracted in to the State Second Pension (S2P).

Investment

The average number of funds offered by trust-based plans is 12 and for contract-based plans is 46. 91 percent of plans offer a default fund option, which 90 percent of members take up. “Lifestyle” is by far the most common default fund (84 percent).

Communication

There is a substantial gap between employer objectives for their plan and reality. The top success factor by a significant margin is for the plan to be valued by employees (78 percent), however only 16 percent of participants believe they have been successful in achieving this objective and 29 percent don’t have a documented communication policy.

Personal Accounts preparation

95 percent of participants offer voluntary membership of the DC plan to employees and 50 percent believe the introduction of Personal Accounts in 2012 will lead to increased costs. 45 percent of participants are considering introducing auto-enrolment during the next two years and 23 percent of participants have not yet considered the impact of Personal Accounts on their business.

To find out more about the results of Mercer’s global DC survey, visit  Mercer Global DC Survey  or access our  Interactive Survey Tool.

For more information on benchmarking the survey with your scheme or to discuss the important trends, contact your Mercer consultant or email  Mercer Foresight.