Pensions - Articles - COVID19 is giving DC pension schemes cause for thought

Aon has said that the effects of the COVID-19 pandemic – both present and expected – are giving UK defined contribution (DC) schemes reasons to re-evaluate many of the ways they operate, including their investment approach and administration.

 As part of its 2020 DC & Financial Wellbeing virtual conference series, Aon polled attendees on how the current pandemic had affected objective setting and the long-term goals of their schemes. Over 50% of the respondents said they had reviewed objectives for their DC plan following the events of the first half of 2020, with 20% saying they had subsequently made changes to get back on track where necessary. However, another 40% of respondents said they had yet to consider their longer-term objectives, as short-term actions had dominated their time and thinking,

 Ben Roe, senior partner and head of DC consulting at Aon, said: “The last four months have provided plenty of challenges and UK DC schemes have had much to think about. However, given that disruption, it is encouraging that many DC schemes have still been able to step back and consider the long-term impact of COVID-19. Some have already looked into the steps they need to take to mitigate any downside where possible.

 “However, it’s clear that for some schemes, the sole initial focus has been on the immediate challenges – in whatever way they have presented themselves. That’s no surprise – the combination of market volatility, resource constraints or administrators with differing levels of ability to adapt to new ways of working, would exercise any scheme.”

 Ben Roe continued: “It is key for schemes to ensure that their immediate crisis resilience plan response is effective in the short term, before also considering the longer-term impact.”

 This COVID-19-driven reassessment is also beginning to lead to a more fundamental review of the way schemes are operating, with 1 in 4 schemes considering changes to the way they are run or administered. In line with that, 1 in 7 sponsoring employers have already started to consider cost savings that are likely to impact their DC schemes. By contrast, it seems that despite actions such as furloughing and the expectation of recession, very few DC scheme members have so far reduced their contributions.

 Ben Roe said: “It may be a case of schemes and organisations not wanting to ‘waste a crisis’ but one outcome of the recent challenges is that a quarter of schemes are considering changes to how their scheme is managed. There may be a variety of reasons for this – gaps in resource or inadequate systems back-up, both of which may have been highlighted by recent events. It’s likely that this is accelerating the drive to a more modern or outsourced approach, such as moving to a master trust or shifting to a bundled administration or investment provider.

 “Maybe less surprising at this stage, is that 1 in 7 schemes are expecting cost savings from their sponsoring employer to impact their DC scheme. Whether this manifests itself through lower company contributions or a reduction in budgets for communication or governance support, it is likely to be detrimental to DC members over the longer term. Similarly, it may be that the furlough scheme has kept down the number of individual members reducing their level of pension contributions so far.

 “Either way, both these situations could become more widespread as COVID-19’s economic impact is felt more broadly. This will put the onus on those in charge of running schemes to retain the ability to stay flexible and to be capable of adjusting their planning in line with whatever transpires over the coming months and years.”

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