UK DC default design – guiding principles 

If you don’t know where you’re going, any road will take you there.
Lewis Carroll

This quote from Lewis Carroll feels particularly apt in the context of designing a default strategy for members of a Defined Contribution (DC) Scheme.

Read the full version of this paper as we explore how the DC market has evolved in the UK, pertinent lessons learned both here and in more mature DC markets and the importance we place in ensuring these learnings inform our views on best practice design for a default strategy. Our thoughts are framed around a set of guiding principles that we believe hold true in any environment and should underpin the default design process.

While it would be neat to put forward a single default strategy that will be optimal for all DC members in all environments, this paper highlights how it’s unfortunately not so straightforward and some element of compromise is nearly always required.

In many ways, the UK DC industry is unrecognisable from when Auto Enrolment was first introduced over a decade ago - as we’ve seen a ten-fold increase in the number of people saving into UK DC Schemes since its introduction in 2012, and with total DC assets increasing by 546%  from 2012 to 20231

We’ve witnessed an emerging maturity in the UK DC market where there’s clear evidence of a shift in focus. We are moving from solely encouraging members to join and save into a DC Scheme, and instead, we are now emphasising the importance of considering the level of annual income their projected pot could support in retirement. Ultimately, the standard of living they will have in retirement is likely to be the most important factor for most members. Against this backdrop, our guiding principles, while still centred on delivering good retirement outcomes for members, have necessarily evolved over time.

DC default design – guiding principles

In our view, the key considerations concern members' evolving needs and wants over time and how to design the structure that best meets these for members who choose to remain invested in the default option. While there may not be one single optimal default approach that is suitable for all DC schemes and compromises are often required, we believe the best design will seek to strike the right balance for each particular DC scheme.

Read the full paper for our set of guiding principles that provide the framework for our approach to designing appropriate default strategies. This incorporates what we know of the UK DC market today and lessons learned around member behaviour over the past decade.

Default design – implementation constraints

Portfolio construction plays an important part in the design of any investment solution and is a critical component in a default investment option’s ability to successfully achieve its stated objectives. In a UK DC context, we recognise a variety of compromises might need to be made when considering any changes to the default arrangement. Some examples are set out below. 
  • Operational
    What is actually feasible to implement (via platform provider, scheme administrator or otherwise) under the current implementation approach?
  • Governance
    What is the governance bandwidth of those with fiduciary responsibility for the DC default strategy under the current structure?
  • Costs
    This will be a multi-faceted issue to be considered. For example, are the operational or governance costs of implementing changes to the default seen as prohibitive? How will any proposed investment changes impact the charges borne by members? Will the lowest cost option really provide the best value for members over the long-term?
The primary focus of the fiduciaries in charge should be guided by opportunities to improve the expected outcomes for members in retirement. We recognise that agreeing a way forward when balancing these constraints could require some challenging discussions.

Summary / Conclusion

The evolving nature of what is likely to best serve members at different stages of their life and the often scheme specific constraints to be considered lead us to recognise that a reasonable case can be made for different shaped default strategies.

At Mercer, treating members’ expected outcome in retirement as our “north star” to guide all other parts of designing and monitoring the DC default strategy is fundamental to our approach. In line with the PLSA retirement standards, and anchored by our Retirement Readiness analysis, we want to ensure that members have the best chance of achieving an adequate and sustainable income in retirement.

However, despite this important evolution in our thinking about how DC defaults are designed, we also recognise that a multitude of factors typically require consideration for any individual DC Scheme and some compromise is nearly always required. 

It is key to reiterate that there is no “one size fits all” approach when designing the default investment strategy, and what may be appropriate for one DC scheme may not suit for another. We believe that default design should not remain static and should adjust to reflect changes in membership and in member behaviour both within the scheme and across the industry in general. It’s also important to consider the types of asset class and investment funds available to DC schemes as these will undoubtedly continue to evolve.

We continue to challenge and debate our views on best practice DC default design as the market (both here and overseas) evolves further. Ultimately, we believe the design process should be underpinned by our guiding principles and leave enough room for Scheme-specific factors to influence what is ultimately made available to members.


1. As at 1st January 2023. Source.

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