In life, things can become so complex that we lose sight of what we are trying to achieve. This has become increasingly true of defined contribution (DC) pension schemes. In a world of regulatory change, volatile markets and cost pressures, DC schemes have understandably focused on how much is paid in, keeping abreast of constantly changing rules and investment performance against the market.


The Pension and Lifetime Savings Association’s (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. But DC schemes might not always consider how the likely outcomes for their members match up to these standards.


We’ve been working with a number of schemes to get a clearer picture of where they stand and what actions they can make to improve potential outcomes for members. In our view, the biggest risk a pension scheme can have is people not having enough money to retire.


Mercer has established a Retirement Readiness Index that assesses and grades members’ prospective retirement benefits. The analysis can explore differences by factors such as location, age and gender. This gives schemes the insight into whether the scheme is good, interventions targeting specific actions to improve member outcomes and tools to monitor the impact of any changes the scheme might make.


These interventions span the scheme’s design, take-up rate, investment strategy, and when and how members access their benefits. Often they involve targeted communication from the Trustee or provider to specific cohorts of scheme members.


One scheme we worked saw members about 70% on track to have a comfortable retirement (as defined by the PLSA) on average. A large cohort of members weren’t making the most of company-matched contributions so the scheme wrote to those members encouraging them to do so.


That scheme also found their gender pay gap was about 5% but its gender pension gap was around 20% - a result of contributions ceasing during maternity leave (and the loss of compounding from this service). As a result, the company will be putting measures in place to contact women going on, and returning from, maternity leave to help them to make good the shortfall in their pension savings.


In difficult times, focusing on making sure employees have a comfortable retirement is a good news story. A manufacturing company badly affected by Covid-19 was constrained on pay and bonuses but was able to tell its workforce about measures to improve retirement outcomes with benefits for morale.


A scheme we worked with had service-based contributions that paid more according to how long someone had worked at the company. On inspection, the company realised this wasn’t good for younger members and so is looking at revising the contribution structure to allow these employees to save earlier and benefit from compound returns (at no additional cost to the company).


Other potential actions include adjusting the rate at which members are auto-enrolled, reviewing the scheme’s investment strategy, benchmarking investment charges and setting a higher retirement age.


Focusing on outcomes is the right thing to do because schemes exist to provide a good retirement income for members. It can also help with business planning; enabling older employees to retire makes way for the next generation.


We’re in conversations with companies and trustees about how to do DC better across a range of subjects. An important part of those discussions is helping DC schemes refocus on their core purpose – providing a good retirement for their members.

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