A five-pillar blueprint for global DC management
In global organisations, local nuances and inconsistent employee investment are making consistent DC offerings harder to deliver.
Local and global-level oversight has long been neglected for defined contribution (DC) plans, yet they now provide the majority of retirement benefits within most global organisations. With trillions of dollars in assets in DC plans, often with a lack of structured oversight and governance, poor performance of these investments is a potential problem for plan managers and plan members alike. The challenge of managing these funds only increases where multinational organisations may have multiple plans spread around the world, managed by a single shared service centre.
Meanwhile, local HR teams are becoming leaner and don’t necessarily have the expertise — or time — for DC plan management. At the same time, workers realise that state plans will end up providing lower retirement benefits as the number of retirees per worker increases, meaning they will come to rely more on private pension provisions. As a result, employees are likely to more closely interrogate their investment performance, as well as their fund fee levels. For example, our 2022 Inside Employees’ Minds research suggests that, in the US, being able to retire was the second biggest concern for workers, after covering their monthly expenses.
All of the above means employees are asking their employers more questions about the investment options available, such as ESG funds. There is also a growing employee need for online access alongside greater flexibility in managing their investment choices. These trends are increasing the pressure on employers to protect employees’ retirement outcomes while investing funds in a sustainable way.
Centralising the approach to DC management on a global scale potentially streamlines processes, aligns behaviours and reduces complexity. When done correctly, a centralised approach offers employers greater control over strategic workforce planning and better oversight of the overall cost of a pension scheme. This, however, must be balanced alongside local regulation and nuances to truly optimise the employee experience and mitigate regional variation. There are five pillars where a commitment to excellence can help employers achieve effective DC plan management at a global scale.
The five pillars of global DC management
To avoid legal and reputational risk, as well as impacts on budgets and planning, it’s critical that local compliance in all employee regions is fully integrated into plans managed at a global level.
The smallest countries often pose the greatest risk from a compliance and administration perspective, creating long-tail risk that could take a considerable amount of time and expense to resolve down the line.
Controls and documentation are the bedrock of compliance, helping employers to keep track of legislative updates around the world and maintain appropriate audit trails, however centralised compliance procedures are only as good as the communication, monitoring and implementation controls that go with them.
Mercer produces a monthly legislative update that can help employers keep up to date with some of the most important changes to legislation around the world. Having strong local advisers should help reduce the risk of non-compliance and global adviser check-ins can help reduce the risk further, if known local non-compliance is reported to the regional or global level.
The key takeaway: Understanding compliance risks in all regions under a plan is paramount for successful global DC plan management, and centralised teams must be supported by appropriate local controls.
Employers can improve outcomes through vehicles for saving, debt management, insurance and decumulation tools, and these require investment in design, implementation and explanation if they are to financially empower their workforce and improve overall outcomes.
Considering the local nuances in each country, finding global solutions to improve financial wellness outcomes often relies on local vendors and solutions to roll out such tools, but variety here risks centralised teams having to manage many different approaches and offering an inconsistent global approach.
Since DC plans don’t necessarily incentivise workers to stick with their employer, contribution levels, vesting schedules and leave provisions all need to be considered. Legal requirements and typical market practice vary across countries in terms of what retirement benefits are on offer, so some companies are designing their plans with global minimum standards in mind, regardless of local fluctuations in standards or legal requirements.
Alongside this, employers and employees alike have a growing interest in long-term savings plans to cover unexpected events or time out of work (such as career breaks), with businesses under pressure from employees to provide assistance with their lifetime savings. There is an increasing need to improve financial wellness, education and stability. According to our Inside Employees’ Minds research, only 46% of US employees are confident they can turn their retirement savings into a consistent stream of income in later life.
The provision of sustainable, equitable outcomes worldwide also reflects the need to address the gender pension gap and other elements of diversity, equity, and inclusion (DE&I), including the need to support an ageing population. According to the World Economic Forum, the gender pension gap exists in most retirement systems around the world – 34% in the US and 40% in the UK – and persists even though longer life expectancy suggests women require larger savings than men.
The key takeaway: The nuances of plan design require more detailed analysis than can be obtained by focusing on typical market practice. A well-designed plan can drive equity and differentiate employers on the global stage.
Employees in DC plans rely heavily on plan sponsors and fiduciaries to design and monitor a valuable, cost-effective programme to help them achieve a secure retirement, without being subject to uncompetitive fees as their balance grows. This comes with the expectation of access to high-performing institutional investment vehicles and top-tier customer service from DC plan vendors. Effective monitoring of investment performance is a critical component to maximise retirement readiness and minimise fiduciary risk.
Alongside this, people increasingly expect their employers to invest responsibly, with over a third (36%) wanting to see socially responsible and environmentally friendly investing options. Offering these options under savings plans can demonstrate alignment with your company’s ESG commitments.
In many markets, there is a rise in Master Trusts where third-party fiduciaries take responsibility for the choices of investment managers for a range of pension providers or employers. This outsourcing of investment strategy and manager selection is particularly attractive in markets where there is insufficient bandwidth or in-house expertise.
The key takeaway: Employees are increasingly scrutinising the value they’re getting from their plan investments, doing so with sustainability in mind. Meanwhile, employers are turning to third-party products and providers to help ensure their investment strategy remains optimised.
Employees often struggle to predict their future spending needs, which can make planning for retirement difficult. Meanwhile, employers face the challenge of effectively communicating their savings plans to both current and prospective members. Failure to do so can negatively impact outcomes and potentially harm the long-term financial stability of the fund.
Effective vendor management is key to improving employee experience and outcomes. For example, retirement communications are often online, yet frontline workers are less likely to regularly access their company email. To bridge gaps like this, a vendor will need to engage with employees in alternative ways, so no-one misses out. Since the recordkeeper is typically the primary contact for employees with respect to their retirement plans, their messaging (or that of vendors in general) needs to be consistent with your firm’s communication strategy.
The key takeaway: Securing an innovative vendor with a tailored communications strategy can effectively meet the needs of a greater proportion of the workforce and improve employee outcomes.
A global DC plan management solution can leverage global buying power for all plans with a streamlined approach. Consolidating and harmonising DC plans into Master Trusts simplifies administration, potentially saving time and money while improving employee outcomes through leveraging economies of scale. It can also provide a robust operational support structure, including a third party responsible for making sure that you are up to date with legal and regulatory developments. Also, effective retirement plan outcome modelling tools, combined with nudges to encourage additional saving, can help employees feel more comfortable with their projected retirement outcomes.
Although the process can be complex, an effective global governance structure offers many benefits to a plan sponsor looking to improve the management of plans worldwide, including proactive risk management, timely and consistent decision-making and potential cost savings.
Effective governance of DC pension plans requires strong compliance and calls for flexibility to ensure that company and employee contributions invested in DC plans have maximum impact and can be adapted whether for regional variations today or a change in future circumstances.
Consistent retirement plan management across regions, clarity over plan responsibility, oversight of retirement agreements between the local employer and employees, and the alignment of retirement operations with the HR model are also important considerations. HR teams must assess engagement with the plans and track take-up rates across the employee population in order to respond early to regional developments that could affect employee outcomes or the future performance of the fund itself.
The key takeaway: Centralised governance enables better decision-making in retirement plans. However, it is critical that the chosen governance structure can be implemented by local teams. Otherwise, third party assistance should be considered.