An improved model of engagement is necessary to encourage defined contribution (DC) scheme members to better tailor their investment strategies and suit their individual needs for retirement, says Watson Wyatt.

The financial consultant believes that by establishing retirement targets, developing long-term saving journey plans and by monitoring progress, DC members will be able to take appropriate actions to ensure they have adequate savings for their retirement.

Journey planning - a more engaging approach has been published by Watson Wyatt, and splits members into categories based on their willingness to be engaged: the true defaulters, who do not have any financial expertise nor interest in pension savings; the guided-selectors, who have the potential to be more engaged and have some financial knowledge; and the self-selectors, who are motivated and financially literate, and are willing and able to make investment decisions.

"In the current environment, where there is so much doom and gloom around pensions, it would be very useful for DC members to be able to put into context where they are on the savings journey relative to where they ought to be," commented Gary Smith, senior consultant at Watson Wyatt. "In many cases this would put the benefits of saving for retirement into better perspective and help allay fears about never being able to retire. While DC plans need to recognise that they are unlikely to ever get the majority of their members proactively making savings and investment decisions for themselves, this more engaging approach can, we believe, help encourage a greater number of those willing to engage within DC plans."

Smith added that DC members are more likely to achieve retirement targets if they have "more clearly articulated goals and the level of interest, ability and tools to support their decision-making along the journey".

For example, by monitoring progress against a target, members would better understand and manage their exposure to investment risk, says Watson Wyatt.
"While the annual benefit statement provides basic information, it does not give members any idea of their progress and is generally not helpful in overcoming the 'set and forget' mentality, resulting in decisions made on joining the scheme rarely being changed. What members need is tools, structure and guidance to make informed investment and saving decisions.

"Retirement targets are the whole point of building a DC fund and if DC members do not know what they are aiming for, it is probably too difficult for them to commit to saving to even to take an interest. By using tools that incorporate investment risk, contributions and retirement dates, members are far more likely to engage and ultimately make a success of their DC pension," added Smith.

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