Julie Walker explains why the DC administration report should be used to address fundamental questions about the structure and running of the scheme

Pure trust-based defined contribution schemes are relatively rare in the third party administrator (TPA) world where DC schemes are often the next phase in the lifecycle of a closed DB scheme or the best option for employees who came along too late to grab a place on the DB train. With a crowded trustee agenda already struggling to make room for the far more attention-grabbing DB administration issues, the more modest DC issues are all too easily shunted into the tumbleweed spot just ahead of ‘any other business’, when most trustees have already checked out and are mentally heading for the car park.

Just a few months ago we were waxing somewhat cynical about whether member engagement, the elusive mystery ingredient in the recipe for ‘good member outcomes’ was actually even possible in the face of a vast and convincing body of evidence pointing to ‘member inertia’ as the dominant behavioural characteristic in member decision making. What we perhaps should have asked is just how far this financial inertia extends? Are immovable members really the problem or are DC trustees and employers resting on their laurels while key questions go unasked and unanswered?

DC reporting
With Andrew Warwick-Thomson, the regulator’s recently appointed executive director for DC governance and administration, focusing on ‘materially improving outcomes for DC members’ and the regulator’s six DC principles highlighting the significance of quality administration, there’s a definite regulatory and industry drive towards turning things around on DC schemes. Assuming this initiative doesn’t drift towards a regulatory box-ticking exercise, the TPA industry would be wise to go back to the drawing board to re-consider what actually constitutes meaningful information for trustees and employers who are making material decisions on DC schemes.

Our entirely unscientific survey suggests that most DC administration reports are slimmed down versions of their much chunkier DB cousins, with a focus on member statistics, trustee discretions and service level agreements - all relevant information in the general scheme of things but hardly the details that decisions affecting members’ long-term financial security should be based on.

Who, what, why and, most of all, how much?
An engaged DC trustee or employer should really be asking much more pointed questions – and the TPA provider, at the front-line in the battle for ‘material improvements’ should be well placed to come up with the answers, or at least fuel the discussion:
• Joiner and leaver rates, opt-outs, opt-ins and associated churn in member demographics – who exactly is joining and leaving and, more importantly, why?
• Investment option selections – both from a scheme level and broken down into age, earnings and any other meaningful categories that emerge from detailed analysis.
• Switching activity levels – is there an indication of too much, or too little, choice? Are there signs of financial sophistication or potential failures to grasp the relationship between investment risk and reward?
• Lifestyling details and terms to target retirement age – do members actually understand the difference between ticking the ‘retire at age 55’ box and the real money implications of funding for 10 extra years of retirement income? Are long-term retirement plans realistic or naively optimistic?
• Annuity rates and terms – how and why are members making their annuity decisions? Are members falling into the easiest option or getting the right support to make the right decisions?
• Take up on variable terms – contribution matching, AVCs, salary sacrifice etc – if members aren’t making use of what’s on offer are schemes really offering what members need?
• Contribution rates and income replacement ratios analysed by age, earnings bands, career expectations, etc – do trustees and employers actively understand the retirement futures in store for their membership? Do members?

Making management information matter
The risk re-balance that comes with a shift from DB to DC shouldn’t be seen as an ‘easy out’ - once made, key decisions around scheme structure, management and options need to be continually questioned and challenged to give member’s the best chance of an adequate income in retirement. Similarly, the administration report isn’t just a means for administrators to flag their performance against service standards. The administration report is an opportunity for trustees and employers to gauge and respond to how well a scheme is performing against the much more stringent and significant criteria of member retirement expectations.

Julie Walker is an associate at Barnett Waddingham

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