Defined contribution (DC) schemes should review and refine their investment approaches to shift their focus from tracking investment performance relative to market indices to targeting retirement outcomes for savers, Aon has suggested.

The recommendation comes after the publication of Aon’s Better Outcomes by Design – 2022 DC Pension Scheme and Financial Wellbeing Survey, which found that only 30 per cent of the 109 UK DC schemes surveyed regularly monitor individual fund performance as experienced by members, whilst 90 per cent monitor performance against market indices/benchmarks.

Even fewer schemes were found to monitor performance against tailored objectives designed to deliver good outcomes for members, with 15 per cent of schemes indicating they did so.

Aon head of DC Investment Advisory, Chris Inman, said that while the concept of a good outcome is generally recognised across the pension industry, there was currently no clear definition that can therefore be incorporated into investment strategies.

“With the diverse nature of DC scheme members only increasing, greater clarity is needed to aid targeting a sustainable level of retirement saving,” he continued.

“Setting specific targets for the aggregate default investment option allows schemes to see the bigger picture and understand whether their default investment is delivering a good outcome for members. This will be increasingly important amid the uncertainty in today’s investment markets.

“We see this as an opportunity for schemes to enhance and improve how they manage the savings of DC members as well as how they monitor performance.

“DC investment strategies are more effective when driven by target member outcomes, rather than de-risked along a pre-established path regardless of progress toward a target or investment market movements - as is the case with the typical lifestyle approach of automatic switching.”

The survey also discovered that 42 per cent of schemes assess all their investments options against environmental, social and governance (ESG) criteria, an increase from one in 10 two years ago.

The firm praised the gain in traction among investors, pointing to 56 per cent of schemes offering one or more ESG option within the wider fund range, while noting that a wide variation in schemes’ approaches to ESG still existed.

However, Aon also found that only 15 per cent of schemes incorporate ESG considerations into default strategies, stating that failure to do so would mean those considerations “will not reach the majority of members”.

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