Almost two-thirds of DC schemes don’t know typical member’s projected outcome

Nearly two-thirds (63 per cent) of defined contribution (DC) pension schemes do not know the projected outcome for a typical member at retirement, research from Aon has found.

The consultancy’s 2022 DC Pension Scheme and Financial Wellbeing Survey revealed that although most schemes were unsure of projected outcomes, 22 per cent said they knew projected outcomes in relation to the PLSA’s Retirement Living Standards.

The survey identified a growing trend in DC schemes focusing on providing an adequate retirement income, with 46 per cent citing this as their main aim, compared to 29 per cent two years ago.

Providing an adequate retirement income had overtaken 'offering a pension benefit broadly in line with competitors' as the most popular driver in overall approach, which fell from 44 per cent in 2020 to 28 per cent in 2022.

However, just 19 per cent of respondents said that the sponsoring employer had considered pension outcomes in relation to its future workforce planning.

Almost half (48 per cent) of schemes were considering changing structure, up from around 30 per cent in 2020, with some citing reducing their governance burden and costs as the primary reason, while others cited expecting better outcomes for members from an alternative structure.

Aon’s survey also identified the growing trend of schemes considering environmental, social and governance (ESG) factors in their investments.

Over four in 10 (42 per cent) schemes now assess all of their investment options against ESG criteria, up from 10 per cent two years ago.

While 93 per cent schemes regularly monitored individual fund performance against benchmarks, only 30 per cent monitored performance overall as experienced by members.

Schemes were found to be increasingly likely to offer a drawdown solution to members, with 46 per cent currently offering and 21 per cent planning to offer a drawdown solution.

This was an increase from around a third of respondents saying they offered a drawdown solution two years ago.

At retirement, 39 per cent of schemes signposted a selected IFA firm to members, while 19 per cent planned to do so in the next three years.

Nearly two-thirds (61 per cent) said they wanted to spend more time on communicating about pensions with their members, 44 per cent planned to provide targeted communications in the next two years and 38 per cent currently do so.

Commenting on the findings, Aon senior partner and head of DC consulting, Ben Roe, said: “There has been a clear shift in the last two years, with schemes putting greater emphasis on delivering adequate retirement income for employees. This is a positive movement away from simply keeping pace with others, and we expect to see this trend continue in the future. Three-quarters (75 per cent) of respondents also said that delivering better member outcomes is now one of their scheme’s key objectives.

“This is a big step in the right direction. Scheme sponsors and trustees are considering what members will receive in retirement and whether this is enough, as well as how they can be helped either by defaults or by nudging them into taking the right decisions. Schemes are on the right track and the intentions are good but let’s see if they result in real action.”

Aon associate partner, Steve Leigh, added: “Generally, while it’s great to see an increase in schemes focusing on outcomes, more can be done to drive positive impact for individuals. For example, the level of contributions made and returns generated after charges are key drivers of better outcomes for members in retirement. However, only 36 percent of respondents have an objective to increase member contribution levels and just 28 percent have specific targets for investment returns.

“More could also be done to understand and track changes in how much typical scheme members will get in retirement. It is a blind spot for many schemes, with 66 percent of them not knowing the projected financial outcome for a typical member. Just a third of schemes assess changes in whether individuals are on track to achieve their retirement goals.

“There are a few quite straightforward ways to address this. While 93 percent of schemes monitor the investment performance of individual funds against their benchmark, it would be a relatively easy step to monitor the overall performance of default options against long-term targets. But only 15 per cent of schemes currently do this.”

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