Defined contribution (DC) pensions are on the rise; more members being enrolled and a resulting increase in assets invested. DC consolidation has emerged as a trend, as many smaller schemes are being consolidated into larger schemes – typically, a master trust.
In January 2023, the Department for Work and Pensions, the Financial Conduct Authority and The Pensions Regulator issued a joint consultation looking at a common framework for assessing value for money across all DC schemes.
In this blog, we explore the key drivers behind DC consolidation, and the approaches employers can take to ensure their DC scheme delivers value for money and good outcomes for their members.
Key drivers behind DC consolidation
Automatic enrolment has led to a significant increase in the number of DC members. Assets in DC trust schemes have grown considerably over the last ten years, from about £20 billion to over £110 billion. This growth has led to an increased focus from The Pensions Regulator, as they are keen to ensure that DC schemes provide value for money and deliver good outcomes for members.
Scheme consolidation is also on the rise, meaning a reduction in the number of schemes, particularly single employer trust schemes established with their own board of trustees. The Pensions Regulator’s focus on governance requirements has played a significant role in driving the consolidation trend, with a particular focus on small schemes that don’t meet the required standards. The development of master trusts has also contributed to the trend, with many master trusts now offering a compelling and cost-effective proposition for employers and their members.
Delivering value for money and good outcomes for your members
Value for money is a crucial consideration for DC schemes, and there are several factors you can consider, including charges, investment strategy, and the overall quality of the provider’s proposition.
Research suggests that average charges for group personal pensions and master trusts are about half a percent a year, and good quality schemes can certainly attract lower charges. Looking at the provider’s charges for your scheme relative to other schemes of a similar size can provide perspective on pricing and help identify where improvements can be made.
Investment strategy is also an important consideration. It’s not just about headline performance, but also the strategy that sits behind it. Different investment managers and funds invest in different assets and in different proportions, and therefore perform differently to each other depending on market conditions. Understanding the strategies that sit behind the investment solutions and considering what’s the right approach for your members is essential. Looking at one metric such as performance in isolation will not give the full picture; it’s important to consider, for example, risk and return together to see where your provider’s default fund performance sits relative to its peer group.
By reviewing your DC provider’s overall proposition, you can consider which provider is best aligned to your objectives and the needs of your members. For example, if your members are relatively young, digital engagement and access to other savings options might be key considerations. For schemes with older members, access to the full range of retirement options – from the scheme to the availability of guidance and advice – will be important. If your scheme is particularly complex, then you will be focused on a provider with a robust administration platform and service.
You can also review your members’ engagement with their pension to consider whether they are planning effectively for their future. Data you hold, together with data from your pension scheme, will enable you to understand the likely needs of your members by looking at demographics such as age, gender, earnings, etc. You can then consider issues such as:
- Are they saving enough?
- Are they invested appropriately?
- How engaged are they with their pension?
- How often do they login to view their pension details?
By understanding the likely needs of your members, and where they are today, you can design a communication strategy to engage your members. This can address information about their pension and the options available to them, relative to their likely goals and objectives. Importantly, by measuring where you are beforehand, you can review the impact that your communications have on member engagement and outcomes.
Conclusion
The growth of DC members and assets has led to an increased focus on governance. Consolidation has emerged as a trend, with smaller schemes consolidating into larger schemes – particularly, master trusts.
Good news. You can make a difference! There are a number of ways that you can ultimately improve what DC schemes are there for – to provide good outcomes for your members to enjoy in retirement. A quality DC scheme offers value for money through good investment returns net of charges, together with a strong overall proposition which is aligned to the needs of the members. It also ensures that members have access to relevant and timely information and support that they will need to make good decisions throughout their lifecycle as a member: from day one, through, and into retirement.
For more information about this topic, watch Buck’s recent webinar, DC pensions: The big picture.