According to official statistics, many retirement savers in the United Kingdom contribute close to the minimum levels as defined by automatic enrolment.[i] We know that for many, this will not be enough for people to live comfortably in retirement. Defined contribution (DC) plans have certainly shifted the financial risk away from companies to individuals. However, plan sponsors may still feel that the reputational risks remain with the company.
As part of our 2019 global survey of retirement goals and challenges, we interviewed 195 DC plan sponsors globally, including 45 from the UK. Here, we’re sharing 6 country-specific highlights:
Plan sponsors often have competing priorities when it comes to overseeing the pension plan and meeting their company’s strategic objectives. Our survey found that 67% of plan sponsors were willing to delegate the selection of specific funds in the default, which could reflect their desire to focus day-to-day work on other matters.
While globally most respondents said that “doing the right thing for my retirement plan’s members/employees” was most important, the UK and Ireland bucked that trend by placing “recruiting and retaining talent” of greater importance. It seems that to UK employers, the pension scheme is used as a tool to promote working for the company, and meeting retirement objectives comes second.
Members to Take the Reins
It is widely accepted in the UK that individuals bear the responsibility when it comes to saving for retirement, a conclusion different from what we would have reached if we had conducted the survey a few years ago, when defined benefit (DB) plans had a stronger legacy.
Despite this attitudinal shift, we know that the majority of UK savers still pay the minimum auto-enrolment contribution rates and that engagement in retirement savings is low, reinforcing the need for nudges such as auto-escalation of contribution rates.
A Helping Hand
According to plan sponsors, members value the ability to access advice most. Respondents also stated that simplicity and ease of use, as well as low cost, would be important. Only 44% of plan sponsors felt that investment design would be important to members.
Compared with the other countries, UK plan sponsors placed the most responsibility for providing and paying for advice on members: 91% of plan sponsors felt that members should source advice themselves and 71% thought that members should also cover the associated costs.
Plan sponsors also noted that the employer could play some role: 71% of plan sponsors surveyed this year felt that the employer had full or significant responsibility in providing members advice.
Our 2018 member survey revealed that even providing simple education on the options available could go a long way in helping members feel prepared for retirement. Therefore, asset managers, providers and master trusts should look to support plan sponsors with providing this “advice” through educational sessions/seminars on the different retirement options available to members.
I Need Results
When we asked plan sponsors what the key criteria were for selecting providers, investment return was a common theme in their responses. This focus on performance is not surprising, as evidence has suggested that savers are becoming increasingly sensitive to market shocks, placing more importance on protection from falls in value than the potential to increase income.[i]
Large falls in financial markets have the potential to seriously knock the confidence of DC savers. It is therefore critical that scheme defaults include measures to minimize significant drawdowns. These behavioral insights, along with the recent periods of global market volatility, reinforce the impact of investment strategies that can help manage risks within DC schemes, including:
1) Strategic diversification across asset classes based on long-term views
2) Dynamic asset allocation based on current market environments
3) Systematic de-risking out of equities closer to retirement
Doing Good and Doing Well
In support of the growing interest in ESG investments that we have observed in the UK, 71% of plan sponsors said they felt that it was important to incorporate environmental, social and corporate governance (ESG) considerations into their plan’s investments.
Despite this perceived popularity of ESG-focused investments, we know that many plans have not yet taken the step to incorporate ESG into their defaults.[ii]
We asked respondents what the reason for not incorporating ESG so far was:
In the past, choosing values such as ESG or performance was often presented as a zero-sum game (i.e., driving impact came at the cost of better returns). We believe this is a false choice and that a company’s environmental actions, social behaviors and governance practices can have a meaningful impact on performance. In our survey, less than a third reported “lower returns” as the key reason for not incorporating ESG to date.[i]
Close to half of plan sponsors (47%) attributed not incorporating ESG to cost, and 36% noted limited product availability. This calls for the industry to continue to innovate in products that not only incorporate ESG values, but also offer value for money. We believe a smart beta approach can help achieve these goals.
We wanted to get the plan sponsors’ perspective on how they see both their plans and the industry changing over the next three to five years. In the UK, the greatest sources of change were thought to be regulations, demographic factors such as living longer, the competitive landscape and technological advancements.
Seeing the Big Picture
Plan sponsors still use pension schemes as an important tool for recruiting and retaining talent. We are seeing pension schemes outsourcing various elements of plan design to providers and master trusts to help meet these goals. Our survey identified a number of areas that asset managers, providers and master trusts can explore to further support plan sponsors:
Provide solutions that are easy for employers to implement and members to understand.
Offer member workshops to help improve understanding of retirement options.
Continue to innovate low-cost ESG products.
[i] Office of National Statistics, at record high but contributions cluster at minimum levels,” 8 May 2018.
[ii] Ignition House 2014 survey for National Employment Savings Trust (NEST). Base=86 respondents. 62 participants placed high importance on “protection from falls in the value of my fund due to stock market movements.” Forty-six participants placed high importance on “the potential to increase my income if stock markets increase.”
[iii] Pension Policy Institute, “ESG: Past, Present and Future,” October 2018. [iv] State Street Global Advisors, “Building a Core with a Conscience ,” 31 May 2018.
The views expressed in this material are the views of SSGA Defined Contribution as at 27 September 2019, and are subject to change based on market and other conditions.
All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Investing involves risk, including the risk of loss of principal. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
Investing involves risk, including the risk of loss of principal. Diversification does not ensure a profit or guarantee against loss.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
Before investing, consider the funds' investment objectives, risks, charges and expenses. To obtain a prospectus or summary prospectus which contains this and other information, call 1-800-997-7327, download a prospectus or summary prospectus now, or talk to your financial advisor. Read it carefully before investing.
Distributor: State Street Global Advisors Funds Distributors, LLC, member FINRA, SIPC, an indirect wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affiliates. Certain State Street affiliates provide services and receive fees from the SSGA Funds.
THIS SITE IS INTENDED FOR U.S. INVESTORS ONLY.
No Offer/Local Restrictions
Nothing contained in or on the Site should be construed as a solicitation of an offer to buy or offer, or recommendation, to acquire or dispose of any security, commodity, investment or to engage in any other transaction. SSGA Intermediary Business offers a number of products and services designed specifically for various categories of investors. Not all products will be available to all investors. The information provided on the Site is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.
All persons and entities accessing the Site do so on their own initiative and are responsible for compliance with applicable local laws and regulations. The Site is not directed to any person in any jurisdiction where the publication or availability of the Site is prohibited, by reason of that person's nationality, residence or otherwise. Persons under these restrictions must not access the Site.
Information for Non-U.S. Investors:
The products and services described on this web site are intended to be made available only to persons in the United States, and the information on this web site is only for such persons. Nothing on this web site shall be considered a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.