Challenges and choices for DC pension schemes in a stormy world 

Volatile markets, geopolitical instability, economic uncertainty and the cost of living crisis are just some of the headwinds faced by trustees and employers. Then there are the constant requirements of regulation, governance and the shift to sustainable investment.

Running through these multiple considerations is the core mission of a DC pension scheme — to ensure the best possible outcomes for your members. Against this backdrop we held a webinar to talk about the themes that should be at the forefront of DC fiduciaries’ minds.

The discussion focused on three main themes and was led by Mercer’s experts:

• Financial wellbeing — with many scheme members under stress because of the cost of living crisis, now is the time to integrate your DC strategy and communications into a broader financial wellbeing framework.
• Sustainability — regulatory and societal expectations will continue to ratchet up the pressure on pension schemes to demonstrate their commitment to sustainable investment.
• Overall value — with inflation running high, now is the time to think clearly about the value your scheme is receiving in a dynamic market.

The webinar, hosted by Senior Investment Consultant JP Crowley, had 114 attendees.  We took the opportunity to ask them some questions that provoked a stimulating discussion with Mercer’s experts.

The cost of living crisis has put the finances of many households under extreme pressure. DC scheme members may be faced with a choice between maintaining their pension contributions and managing their day-to-day finances.

Volatile investment markets also have the potential to undermine confidence in pension saving even though history shows that markets rise in the long run.

We asked attendees if they had spotted changes in members’ behaviour such as opting out, reducing contributions or accessing benefits (if aged over 55).

More than half of respondents said they hadn’t seen a change in behaviour and about 20% reported that members were altering their habits. Senior Consultant Emma Roberts, who focuses on financial wellbeing, said it was good news that members at most schemes were saving as usual. Emma also said the uptick in opt-outs was mainly due to cyclical re-enrolment at the end of 2022. But Emma also noted that 28% of respondents didn’t know if their members had changed their behaviour. Anecdotally we are picking up an increase in members reducing contributions and dipping into savings.

Mercer’s Inside Employees’ Minds study shows that about one-quarter of employees have cut their contributions to employer retirement plans or individual savings because of rising living costs.

Emma said schemes should consider these points:

• Now is the time to review your broader financial wellbeing strategy and member communications to make sure they are supported and you are getting the best value.
• Engage with your members to find out where they need help and what they understand about their existing benefits.
• Prioritise basic financial education to help people get on top of their finances quickly. Many households are unprepared for today’s pressures and don’t understand the rudiments of personal finances.
• Think carefully about the short-term and long-term impact if your members change their savings habits. How flexible should you be, and how can you help them to go back to saving when conditions ease?
• Use data to make the right choices. Don’t make decisions without understanding your members’ behaviour and needs.

There will be no let-up in the pressure to build sustainability into pension schemes’ investments and governance. Some schemes were distracted by the headwinds of 2022 but now is the time to refocus on this important subject. Here is why:

• Regulation is continuing to expand (for example in the forthcoming Single Code of Practice)
  
• Sustainability is high on the agenda for business leaders and schemes’ parent companies.
• Campaigners are stepping up their scrutiny of investors and pension plans.
• Members’ expectations are increasing as the urgency of climate change and other issues permeates public debate.

Many schemes are making good progress and overall the industry is improving but a lot of schemes have still made little or no progress. That was the finding from data generated by Mercer’s RITE (Responsible Investment Total Evaluation) assessment.

We asked attendees at the webinar what was holding them back on sustainable investment.

Senior DC Investment Consultant Adam Hayes addressed each of the barriers identified by respondents. Here are his views:

• Sustainable investment is complex and best practice is developing constantly but getting started isn’t difficult. For many schemes the first step will be to establish trustee beliefs. This is the initial stage on Mercer’s Sustainable Investment Pathway.
• RITE data shows that fewer than half of DC schemes are aligned with their parent company’s sustainability policies. This undermines corporate goals and creates reputational risk for trustees and the sponsor.
• Member outcomes should be enhanced if the scheme embraces sustainable investment. For example, incorporating sustainable funds will expose members to new growth technologies and help them avoid potential stranded assets.
• The cost of achieving best practice may not be as great as some believe, but extra governance will be needed. Some schemes will be able to follow their own path, but many without the scale may consider consolidating into a master trust with strong sustainability credentials.

RITE benchmarks your scheme according to the four stages of our Sustainable Investment Pathway: beliefs, policies, process and portfolio. RITE has assessed more than 1,000 pension schemes, allowing us to analyse your pension plan based on criteria such as scheme type, size and the industry of your sponsoring employer.

RITE provides:

• Insight into how well you are integrating sustainable investment into your DC scheme
  
• Tailored interventions to help you improve
• The ability to monitor the impact of your actions over time

Financially stressed employees and sustainability pressures are just two of the urgent issues facing DC pension schemes and employers. The pandemic continues to affect the way we work and live, businesses are grappling with high costs, and governance risks are multiplying.

Today’s extreme conditions are an opportunity to review your DC scheme to tighten up its performance across the board.

When we asked webinar attendees what their main focus was for this year, more than half said they wanted members to understand and value their benefits. For 30% of respondents, risk reduction was the top priority, and the remaining 11% were most concerned with costs.

Ken Anderson, Principal and DC MOT lead, said all three options are important and are intertwined. Based on data gathered from Mercer’s DC MOT pension audit, Ken made these points.

• The most immediate way to support employees is to tell them what benefits and services you already provide. Many members are unaware of options that could help them, and DC pension schemes need to be proactive in reminding them.
• Complexity and change create risks that many schemes aren’t addressing. These include lapses in auto-enrolment compliance, members losing out because of uninformed decisions, and members not having enough to retire.
• In a high-inflation environment, you need to focus on costs and overall value. For example:

1. Charges have fallen but many schemes haven’t reviewed what they pay for several years.
2. 20% of employers don’t use salary exchange to reduce national insurance contributions for the company and employees.
3. Support services for members are available at no cost from the right provider.

DC MOT is a simple and effective way to review how well your DC scheme is performing. This free assessment benchmarks your scheme against 12 points that are essential to a well-run DC scheme — from scheme design and charges to financial wellbeing and climate change.

JP Crowley concluded the discussion by highlighting the power of communication and data to support your members and get the best value available.

• Data is the key to establishing how your scheme and broader employee benefits compare with the wider market and spotting ways to drive better outcomes for members.
  
• Value is the overall package your scheme and benefits offer. This includes costs, what you get for your money, the support your members receive and the likelihood that they will have enough to retire.