Articles - New Year resolutions for UK DC pension plans


 New Year resolutions for UK DC pension plan sponsors, trustees and governance committees

 The introduction of auto-enrolment from 2012 and the deluge of guidance papers from the Pensions Regulator (tPR) means defined contribution (DC) pensions arrangements will be taking centre stage for many companies and trustees in 2012. Mercer has prepared a list of New Year resolutions that DC scheme sponsors, trustees and governance committees should consider over the next 12 months.
 
 Tony Pugh, European Head of DC Consulting at Mercer, commented: “With further investment market volatility and continued economic troubles, 2011 was quite a year for DC schemes and it was not surprising to see employer contribution rates freezing. 2012 will present new challenges including increased governance and regulation requirements and a seismic shift towards DC pension provision triggered by the UK’s new auto-enrolment regime.
 
 “To deal with the change, it is essential to plan early and not leave things to chance. Planning appropriately will help employers and trustees to make the most of the opportunities that exist and minimise the disruption and costs that legislative change will bring. Even more importantly, proper planning is essential to help the employees engage and make decisions that are appropriate to their personal circumstances.”
 
 Mercer’s New Year resolutions checklist addresses 10 key areas for review. A summary of these is given below:
 
 1 – Set clear plan objectives
 It is essential to have clear plan objectives for all involved parties, including trustee or governance committees as well as employees. Sharing objectives between employers and committees at an early stage allows any conflicts to be identified and managed, and success to be measured.
 
 2 – Consider the adequacy of pension contributions
 Contribution levels should be reviewed to ensure they are in line with scheme objectives and will provide a suitable level of retirement benefits for employees. A recent Mercer survey showed that whilst 79% of individuals would like to retire on incomes above 50% of their salaries, only 43% expect to reach this goal. Over half (52%) of the 1500 survey participants expect to undertake some level of work in retirement. Mr Pugh said: “If contribution levels need to go up then companies and trustees should consider managing this through a “save more tomorrow” solution where members can put aside a part of their future pay rises until contributions reach a pre-determined level. This approach has been shown to have a significant positive impact on employee contributions rates, greatly increasing a member’s retirement benefits.”
 
 3 – Ensure schemes are auto-enrolment ready
 Companies planning to auto-enrol employees into existing pensions arrangements need to make sure the scheme rules and processes are fully compliant. They should also check whether scheme administrators and payroll providers can cope with significant increases in membership across all the pension schemes they handle. Rachel Brougham, Principal and Head of Mercer’s auto-enrolment initiative said: “Companies that delay too long could well find provider capacity exhausted, leaving them facing the prospect and consequences of non-compliance or trying to engage with their second or third choice of pension provider at the last minute.”
 
 4 – Ensure scheme administration is efficient and effective
 The Pensions Regulator highlights the importance of efficient and effective scheme administration in its “Enabling Good Member Outcomes” discussion paper. To ensure service levels are being met schemes should monitor that contribution payments are being received and invested within an appropriate timeframe. Management information reports from scheme administrators should be received and reviewed regularly. Schemes should also make sure they meet tPR’s target date of the end of 2012 for improving the quality of scheme data.
 
 5 – Provide members with education and effective communication
 Educating members will ensure they are better placed to make decisions regarding contribution levels and investment choices. Communicating effectively will remind them to keep such decisions up to date.
 Mr Pugh said: “An effective communication strategy alerts members to issues that affect their pension pot, such as market drops, in a timely and effective way – so they can take a view on whether immediate action is needed.”
 
 6 – Ensure investment options fit the member demographic
 Most schemes are made up of members with widely differing levels of financial knowledge and sophistication, so different investment approaches should be made available to fit their needs. For example, those employees that want the work done for them may access funds that have been put together and named in a way that reflects the amount of risk they are prepared to take (eg. a moderate risk fund or a cautious fund). Employees that want to have ultimate control and regularly make their own investment decisions may consider additional specialist fund options.
 
 7 – Ensure pension scheme has a default investment option that is appropriate for its members
 Mercer’s recent DC survey revealed that 79% of schemes have more than 75% of members in their default investment fund. Ensuring this fund is appropriate for the scheme’s members is therefore essential. The default fund guidance issued by the Department of Work and Pensions will provide some assistance here. Sponsors and fiduciaries should also consider modeling the risk and return parameters of varying default fund designs in order to select the most suitable for the members.
 
 8 – Make members aware of assistance available throughout the retirement process
 Recent changes to legislation on how benefits can be taken at retirement, such as flexible drawdown, require a review of schemes’ retirement processes and the options made available to members on retirement.
 
 9 – Review and negotiate annual management charges
 Mercer’s 2011 DC survey showed that in over 93% of schemes members pay for some or all of the scheme’s investment and administration charges. Auto-enrolment is likely to lead to both increased contributions being paid and increased membership numbers, resulting in many pension providers looking to renegotiate their charging structures over 2012/13. It is important that scheme sponsors and fiduciaries take this opportunity to review, and hopefully reduce, annual management charges, as this could potentially lead to significant savings for them and the scheme members.
 
 10 – Be aware of the implications of taxation changes
 Recent tax changes have meant a reduction in members’ annual and lifetime pensions savings allowances. Whilst managing the tax position on benefits is essentially an individual’s responsibility, there will be implications for the administration of the scheme if tax charges become payable. In addition to reviewing these, schemes should also communicate with members regarding the tax changes and the options that the scheme will facilitate.
 
  

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