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.
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