After the unprecedented year that was 2020, the COVID-19 global pandemic continued to cast a long shadow over 2021. Despite prolonged lockdowns throughout the early part of the year, the vaccine rollout and tentative plans to open up everything from whole countries to coffee shops was enough to keep us looking forward with more hope. The acceleration of existing trends (particularly the evolving nature of how/when we work) was a distinct feature of 2021.

 

Homing in on the UK pensions world and defined contribution (DC) plans in particular, 2021 was far from quiet. The Pension Schemes Act 2021 provided a whole host of measures designed to better protect UK savers, most notably the new climate risk-related governance and reporting requirements for pension schemes. While environmental, social and governance (ESG) considerations have become an increasingly important part of the agenda for DC plans, the arrival (for larger schemes initially) of the Task Force on Climate-Related Financial Disclosures (TCFD) and COP26 in Glasgow has kept climate change high on the agenda.

 

The ongoing focus on consolidation across the DC industry has been most visible with The Pensions Regulator (TPR) requiring that DC schemes with assets under £100m undertake a more stringent value for members assessment (VFM assessment).

 

At the same time, the Pension and Lifetime Savings Association (PLSA) updated its Retirement Living Standards to better reflect the income required to support various standards of living in retirement.

 

Together with the items discussed below, these issues provide the platform for what we see dominating the UK DC agenda throughout 2022 and beyond. It will be another busy year of us doing what we do best: working tirelessly to improve DC member outcomes.


Retirement readiness in focus
 

 

Priority

 

Promoting participation in DC arrangements and encouraging members to save what they can remains a fundamental piece of the retirement puzzle. However, a growing inclination to consider the amount and adequacy of income an individual’s DC savings is likely to provide them in retirement is indicative of an increasing maturity for the UK DC industry. Indeed, we also advocate considering retirement savings as part of wider financial wellbeing.

 

The PLSA Retirement Living Standards give individual pension savers an idea of how much they will need for a certain standard of living when they stop work. However DC schemes might not always consider how the likely outcomes for their members match up to these standards and, more importantly, what they can do to improve outcomes.

 

 

 

 

 

 



 

 

Action

 

Mercer’s Retirement Readiness Index assesses and grades members’ prospective retirement benefits. The analysis can explore differences by factors such as location, age, ethnicity or gender, providing interesting and often challenging insights into how different cohorts of your membership are faring.

 

Our Retirement Readiness Index gives you the insight into how your scheme measures-up, what difference specific interventions could make to improve member outcomes and the ability to monitor the impact of any changes your scheme might choose to make.

 

Take a look here to find out more: DC Schemes: Time to focus on member outcomes.

 

Provide financial wellbeing support.

Consider broader support for your members and employees (including budgeting, debt management, managing pinch points, savings, investments, pensions and protection) to help them take a more holistic approach to their finances.


Sustainable investment in DC
 

 

Priority

 

Considering ESG factors has become a ubiquitous topic in the pensions world today.

 

Most investors are aware that ESG factors are important and that there is a risk and opportunity that needs to be managed. They know that commitments to net-zero carbon emissions are increasing and diversity, equity and inclusion are higher on the agenda than ever before.

 

However, it’s a quickly evolving and complex area with a heavy political and regulatory influence that needs careful navigation.

 

TCFD

 

The regulatory influence over ESG continues to evolve with the Climate Change Governance and Reporting Regulations requiring all schemes with total aggregate assets in excess of £1bn (and all authorised Master Trusts) to report under the TCFD framework (noting timeframes vary depending on overall scheme size).

 

Smaller schemes can expect to report as soon as 2024 with the required framework yet to be announced. These requirements will be enforced by the DWP as the UK has become the first major economy to require pension schemes to specifically consider climate risks.

 

Reporting in line with the TCFD framework should not be underestimated, and it is important to start considering the requirements early. The disclosures are significant and time-consuming and require input from investment advisers, investment managers, custodians, covenant advisors and trustees.

 

Further to this, the government has proposed that by 2025, companies in the UK will be required to carry out TCFD-aligned reporting. With many schemes’ assets exceeding the market capitalisation of their parent, company boards will increasingly focus on their pension schemes’ ESG integration.



 

 

Action

 

Take control of your ESG agenda using Mercer’s Responsible Investment Total Evaluation (RITE). Mercer’s RITE evaluation gives you the:

 

  • Insight into how well you are integrating ESG factors.
  • Bespoke Interventions focused on improving ESG credentials.
  • Ability to monitor the Impact of your actions over time.

To find out more please visit the RITE website.

 

 

 

Climate change reporting – start planning now

 

Begin planning for Climate Change Governance and Reporting Regulations.

 

Mercer fully supports the adoption of the TCFD framework and we strongly encourage you to start the planning soon – reporting is a significant task.

 

To help get you started, talk to us about our TCFD reporting checklist that helps you prepare for these significant requirements.

 

We advise schemes to consult with their parent companies to coordinate goals and ambitions.

 

 

 

 

 

 

 

 

 

 


Consolidation – what does it mean for schemes?
 

 

Priority

 

We heard lots about consolidation in the DC industry throughout 2021. It remains firmly on the radar of TPR and therefore needs to be on the agenda of fiduciaries of DC arrangements.

 

The Occupational Pension Schemes (Amendment) Regulations 2021, enacted on 1 October, 2021 are expected to accelerate the pace of consolidation. The more extensive annual VFM assessment required to be carried out by trustees of DC and hybrid schemes with assets of less than £100m (in order to justify their continued existence) is set to be a key driver of this consolidation trend.

 

The preparation for introducing pensions dashboards will likely serve as a further natural catalyst for more consolidation of member savings in the years ahead.

 

Whether your scheme has assets below £100m or not, the bar of what is expected as a minimum for DC arrangements will continue to rise in the years ahead and therefore having a clear sense of the value you want to deliver to your members and a robust governance plan to execute it will be crucial.

 

Action

 

Where applicable (for schemes less than £100m), be prepared for the more onerous expectations associated with the VFM assessment (and give thought to prudent next steps following assessment).

 

Consider the case for introducing a governance dashboard to bring greater focus to what is prioritised and monitored in an effort to deliver better outcomes for your members. Perhaps start with completing what we refer to as a DC “MOT” of your scheme to identify areas that merit greater attention.

 

Take time to understand the implications of the consolidated code of practice for pension schemes and how its requirements can be used to underpin your existing governance framework.

 

 

 

 

 


Communications and engagement – what does “good” look like?
 

 

Priority

 

The options for how and when to best engage with DC members continues to expand and evolve (spurred on by people’s increasing comfort with embracing new technologies at both home and work).

 

The key challenge, in our view, is working out how best to harness the multitude of different engagement options available and putting members at the centre of your communications strategy, so their interests and preferences are truly informing the approach you take.

 

There’s no single communications and engagement strategy that can be regarded as optimal for all and therefore knowing your membership and what is likely to resonate for them (at differing stages of their working career) is a key consideration.

 

 

 

 

 

 

 

Action

 

Have you considered:

 

- Engagement with communications specialists to implement a tailored plan with measurable targets to achieve your specific objectives?

 

- Varied communication methods, particularly digital and virtual approaches, as well as personalised communications and nudges to maximise engagement and address the needs of your membership?

 

- Might the introduction of simpler benefit statements bolster your members’ engagement with their pension savings? Is there an opportunity to leverage personalised videos to nudge individuals to save more when they can?

 

- Member appeal? With ESG and climate change in particular being at the forefront of members’ minds, consider how the required reporting (for instance PLSA Implementation Statements and TCFD reporting) can be communicated in a more engaging format that will appeal to members.

 

- Engagement with your members through member surveys or workshops?



2022 and beyond will present lots of opportunities and challenges across the DC landscape. As per our priorities set out in this paper, keeping member outcomes at the core of all our efforts is crucial.

 

If you are interested in finding out more about any of the actions above, please speak to your Mercer consultant or contact us via the form below.


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