Identifying risks for Defined Contribution scheme members is key to ensuring
adequate incomes in retirement. By Hymans Robertson
DC schemes must focus on helping members recognise the level of retirement income they need and the risks they will have to take in order to reach this level, if they want to encourage ‘good retirement outcomes’, according to Hymans Robertson.
In response to the closing of the Pensions Regulator’s consultation ‘Enabling good member outcomes in work-based provision’, the pensions and benefits consultant has outlined six risks facing members that DC schemes should address. These risks are:
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That members achieve a level of income that allows them to live a dignified retirement (Benefit adequacy)
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That there is good ongoing management of DC scheme arrangements (Governance)
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That members are appropriately educated and equipped to understand how their DC scheme impacts their retirement plans (Member understanding)
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That the scheme sets sensible investment approaches, offers a proper choice of funds and regularly measures performance to ensure members are benefitting as they should (Investment strategy, choice and performance)
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That members make the right choice at retirement – recognising the options that are available to them and making sure they choose the optimal solution for them (Decisions at retirement)
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That all compliance measures are met for the scheme (Operational risk)
Lee Hollingworth, Head of Defined Contribution, at Hymans Robertson comments:
“The Regulator’s consultation proposed six key elements for delivering ‘good retirement outcomes’. While these provide a structure and foundation for good DC provision, we need to take a step back and make sure an even more important box is ticked – member understanding.
“The focus has to be on helping scheme members understand what retirement will actually mean for them and what it will take for them to attain a decent retirement income. In this regard, educating them about what their scheme is, what it does for them, and how saving into it will affect their retirement is of paramount importance.
“Workers continue to be unenthused by pensions, and by DC in particular. If we’re going to change perceptions about what DC can do, then we need to focus members’ minds on where a DC pension fits in terms of their overall retirement aspirations. DC can be a success, but only if you place generating an adequate retirement income for members at its heart.
“To support member understanding, good governance, clarity on investment decisions, and an engaging communications programme are key to sustained DC success. The final step to success is to help members understand the flexibility that exists to deliver their retirement income. In particular, this means increasing awareness of the Open Market Option (OMO) when choosing an annuity, and the new options for the drawdown of benefits in retirement. To that end, we would like to see the OMO and drawdown adopted as default positions in all DC schemes.”
Hymans Robertson’s submission also called on the Regulator to improve standards of DC governance. To do this, they proposed that the Regulator provides a clear governance framework that drives accountability across the DC industry.
Barry Mack, Head of Governance and Plan Management, adds:
“There is clearly a need for a strong governance process in all DC arrangements. At present, this process is more prevalent amongst larger employers than their smaller counterparts. To that end, we support the NAPF’s position that low cost ‘super trusts’ should be encouraged to benefit smaller schemes. These trusts will enable them to benefit from the more robust governance structures that exist within larger schemes.”
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