Is your Defined Contribution pension scheme ready to improve overall value in 2023? 

Although it is a key component, a rewards package isn’t just about the pension. It’s interwoven with the range of benefits and support offered to members. As the rising cost of living puts pressure on household budgets, workers are looking to their employers for help in managing their finances.

As a result, financial wellbeing at work is moving from an optional extra to become a core HR concern as employers seek to support, engage and retain people. Mercer’s Financial Wellbeing Report found that the proportion of organisations with a financial wellness strategy more than doubled to 36% in 2021 from 15% four years earlier.

We expect that trend to continue as employers seek to provide urgent assistance for their people in the cost of living crisis. Employers may not be able to offer a pay rise that keeps pace with inflation but members will appreciate it if offered ways for them to make good choices.

Financial wellbeing benefits employees and employers. If your people are on top of their finances, they will be happier at work and more productive. If they are worried about their financial situation they will be distracted, stressed and more likely to feel unwell.

Consider providing broader support for members to help them budget, manage debt and deal with pinch points as well as considering savings, investments, pensions and protection.

Help with financial wellbeing doesn’t have to be expensive for employers. You may already provide support that needs highlighting now times are difficult. Your pension provider may also offer free online tools for managing finances.

Mercer’s DC MOT data showed more than 60% of employers organise financial wellness webinars and presentations with more set to do so. You can find out where you stand in the market by taking part in our Financial Wellbeing Index or a DC MOT.

In line with our emphasis on value, our research shows that simply adding products and services isn’t a good use of money. You may wish to talk to your people to find out what they already value and what help they need.

Will members have enough money to retire at the time they expect? Helping members define their needs and giving them the opportunity to achieve their goals is arguably the most important aspect of pension provision.

Yet many schemes have been distracted from this core mission by the increasing complexity of running a DC pension arrangement. Our DC MOT data showed 74% of employers don’t know what level of pension their DC members are expected to receive when they retire.

The Pensions and Lifetime Savings Association’s (PLSA) Retirement Living Standards have helped refocus attention on retirement readiness by giving individual pension savers an idea of how much they will need for a certain lifestyle in retirement.

But many schemes and employers may decide they need to do more — especially as we see members opting out of DC schemes to cope with the cost of living crisis. Our analysis indicates that if someone on an average income opts out for three years with inflation staying at current levels their pension would be cut by 10%.

By providing a benchmark to show whether members are on track, the PLSA’s standards enable us to have more meaningful conversations as Generation DC nears retirement age. But our DC MOT data found that about three-quarters of schemes aren’t considering projected outcomes at retirement for their membership and using these insights to inform future strategy for the scheme.

The point of providing a DC scheme and making often generous contributions is undermined if employees reach retirement age without enough money to stop work. And if members choose to keep working because they are short of money this may impact HR planning and potentially create tensions among the workforce.

Mercer’s Retirement Readiness Index (RRI) assesses and grades members’ prospective retirement benefits. Our analysis can segment a scheme’s membership in a variety of different ways (including age, ethnicity, gender and location) so you can explore the path members are projected to be on for retirement.

The RRI gives insight into how your scheme measures up, how different interventions might improve member outcomes, and the ability to monitor the impact of changes made.

A DC MOT can put you on the path to improving retirement readiness by checking how your scheme compares on measures such as investment strategy, contribution design and modelling member outcomes.

PLSA. “Pensions See First Signs of Cost-Of-Living Crisis and Pension Schemes Responding by Providing Extra Support to Their Members,” available at www.plsa.co.uk.

Mercer. “Defined Contribution Investment and the Cost of Living,” available at www.uk.mercer.com.

Options for communicating with employees continue to expand and evolve as people conduct more of their lives online. Yet too few companies engage regularly with their people to find out what they need and remind them what support is available.

Our DC MOT data shows 60% of employers haven’t asked their employees in the past three years whether they understood or valued their benefits — and most of these had never asked the question.

Employers could be spending lots of money on benefits that employees largely don’t understand or appreciate. In a competitive jobs market, it’s in employers’ interests to make sure employees understand the value of the benefits they provide. The same applies in the cost of living crisis when people are looking to employers for support.

You may wish to consider carrying out a survey to find out what members understand about their benefits and where they think they need more support. You might then put a scheme-specific communications strategy in place with measurable targets to achieve your objectives.

Here are further actions to consider:

• Webinars that employees can take part in or catch up with online
  
• Infographics and videos to bring standard documents to life, simplifying the information members need
  
• Personalised nudges to remind people about their benefits — for example linked to work anniversaries
  
• With climate change and other sustainability issues at the forefront of many members’ minds, report on these subjects in an engaging way to get people thinking about pensions and benefits.
  

Keep doing these things. Communication needs refreshing regularly to keep members engaged as their needs evolve.

Environmental, social and governance (ESG) issues remain high on the corporate agenda as business leaders respond to political, investor and public pressure to behave sustainably and ethically. These pressures are increasing as the climate crisis intensifies, regulation expands and campaigners step up scrutiny of companies.

These requirements also apply to companies’ DC pension schemes. Schemes with net assets of £1 billion or more will be required to report in line with the Task Force on Climate-Related Financial Disclosures by the end of December 2023. Smaller schemes should prepare to start reporting under TCFD as soon as 2024.

Mercer’s analysis shows a transformation in schemes’ understanding of the potential risks and rewards attached to ESG. Data generated by our RITE (Responsible Investment Total Evaluation) assessment showed 98% of trustees believe ESG issues create risks and opportunities and can have a material impact on investment returns delivered to members.

Despite this, our DC MOT data shows fewer than half of employers stating their DC scheme’s investments are in line with company sustainability policies. This disconnect risks damaging a trustee or employer’s reputation, especially if — as we expect — DC schemes’ ESG credentials continue to face greater scrutiny. And RITE data showed only 38% of DC schemes include a dedicated ESG fund in the default investment strategy.

Most schemes are playing catch-up on ESG in a fast-changing market, RITE data shows. The important thing is to get started by finding out how you compare with your peers and best practice.

RITE shows how a scheme scores according to the four stages of our Sustainable Investment Pathway: beliefs, policies, process and portfolio.

RITE provides:

• Insight into how well you are integrating ESG into your DC scheme
  
• Tailored interventions to help you improve
  
• The ability to monitor the impact of your actions over time
  

Another preliminary option is to take a DC MOT, which will provide you with insight into how your scheme measures up to your corporate values.

As we have shown, the workload facing DC pension schemes and their trustees keeps increasing — and it will continue to do so.

In this environment, schemes have two options: govern or consolidate. Some schemes will have the capacity and desire to shoulder the growing burden but many others will find it difficult. The Pensions Regulator has indicated that smaller schemes should consider consolidating and initiatives such as pensions dashboards and TCFD are likely to accelerate the trend.

For trust-based DC schemes, consolidating into a master trust may be an attractive option that is worthy of consideration. A DC master trust potentially offers members access to a broader range of investments, better support and improved governance. Contract-based schemes may also have the option of grouping together several legacy schemes.

But consolidation is a spectrum of options and should be considered in this way rather than simply being seen as a binary decision between the status quo and a master trust. For example, consolidation can include everything from appointing a professional trustee or sole trustee, fiduciary management of your scheme’s assets to selecting a master trust.

Taking a DC MOT will give you a quick view of where your scheme sits in the market and how it might need to improve.

You may wish to consider what requirements are coming down the road and whether you have the capacity to deal with them alongside the other demands faced by trustees.

If you think you might struggle to govern your way along the path ahead, talk to your advisor about the range of options available and the potential benefits for you and members.