DC Pulse

DC World
September 2010

Pension Pulse sees pressure rising
We live in difficult times. Our economy, our financial markets and our pension industry seem in a state of unparalleled flux.

But in tough times, it's often better to know what's facing us. With that in mind, a new research partnership has been set up, to better understand the radically evolving pensions landscape.

Taking the pulse of the pensions world
The first edition of DC Pulse, a research collaboration between The Pensions Management Institute and Standard Life, has generated compelling new findings on the contentious areas of pension reform, engagement, plan structure and governance.

The main aim of the research survey is to take the pulse of work-based defined contribution pensions; in both trust and contract-based environments. The research aims to shape industry thinking as defined benefit pension schemes continue to give ground to DC provision.

The first DC Pulse has surveyed the new territory and provided much-needed clarity about how DC pensions will look like in the years to come. The focus of the research has been on anticipating the post 2012 environment, with DC pension topics such as volatility, flexibility and scalability to the fore.

Pension reform - large companies to abandon the NEST
DC Pulse believes that NEST (the National Employee Savings Trust) is viewed as largely irrelevant in terms of larger employers' strategy to adapt to the post-2012 environment. According to the research, the majority will mostly rely on their existing arrangements, and will make use of NEST only if it fits into their plans.

The research has also revealed that the biggest concern for DC scheme sponsors is the distraction caused by the legacy of existing Defined Benefit (DB) schemes. This, in turn, has had consequences for the effective implementation of successor DB schemes.  In many cases this has resulted in "temporary" DC arrangements being implemented, and there is now a significant increase in the number of DC scheme re-constructions.

Engagement - who cares about pensions?
A substantial gap exists between the eligibility to join a workforce DC scheme and the actual take-up. According to the research, the greatest perceived barrier to new recruits joining a workforce scheme is that employees do not value saving into a pension.

Along with the usual behavioural factors such as inertia, a reflection of modern employment trends is that new recruits do not expect to be with the employer for very long. The average job tenure for UK employees in the Generation Y (under 30s) is 16 months, and it is just three years for Generation X (30-45).

From the employer's point-of-view, there are some hard truths. The majority of employers believe they are achieving no better than an adequate return on their benefit spend.  There is a real danger this could result in a vicious circle with employers reducing spend in this area.
Employers see few positives in pension reform; auto-enrolment and flexible retirement options are generally benefits for employees, while the reductions in tax relief on pension contributions for higher earners only as an advantage for the government.

Despite this, employers continue to invest in employee engagement. An impressive 81% consider it is important to provide good financial education to employees to allow them to make better-informed decisions; 79% already provide advisory services to DC scheme members. This reflects an increased awareness that value must not only be created; it must be seen to be created too.

Plan structure - common sense prevailing on fund choice
On the plan structure front, DC Pulse made encouraging findings. There is a general downward trend in the number of funds offered by DC schemes with between two and ten funds emerging as the optimum number. This indicates an important trend away from complexity and the 'paradox of choice', and back towards Lord Turner's vision of pension simplification. As expected, the vast majority of DC schemes are using lifestyle strategies as their default investment option.

There is encouraging evidence of a positive forward-thinking approach. A substantial number of respondents have considered alternatives or additions to their DC scheme with employee wealth platforms coming to the fore.

In terms of contribution structure, matching is a popular route. In fact, double matching seems to be an increasingly common approach. However for those companies surveyed for DC Pulse, there is a wide range of DC contribution levels from 3-12%. Even at the most generous end of this scale it, still contrasts with DB schemes where the figure averages 20%.

Governance - more needs to be done
It is very encouraging that most firms conduct reviews of their DC scheme. Investment choice has become the key focus of governance. Around 85% of the survey including this in the latest review of their schemes. And with more than 80% of those conducting an investment review deciding that some form of change was required, this indicates that the reviews are not just box-ticking exercises. We expect that this trend will continue as the focus on default funds intensifies as we approach 2012.

However, the widespread consensus is that employees have to accept responsibility for educating and informing themselves about financial matters. The increasing interest in trust-based DC schemes may support the view that they provide a better governance solution for employers and members alike and tend to give more clarity of ownership and leadership. But this contradicts the actual statistics that show the majority of new schemes are set up on a contract basis.

Conclusion
While the pensions industry is navigating its journey through turmoil, we can see clear signs that we are genuinely learning lessons and deploying innovation to ensure that we continue to make progress.  Today's environment is also providing huge opportunities for forward-thinking and innovative employers, trustees, and advisers. It has been said, "When it is dark enough, you can see the stars!"