Nearly two-thirds (65 per cent) of those running defined contribution (DC) pension schemes do not know how much a typical member can expect in retirement, research by Aon has found.

It showed that while 61 per cent were focusing primarily on providing good value for money, many did not know what this would mean for the expected pension outcomes for their members.

The survey revealed that the most popular approach for pension propositions was to offer a benefit that was in line with competitors (42 per cent), ahead of offering a pension designed to deliver sufficient funds to enable workers to retire at a ‘reasonable’ age (36 per cent).

Nearly half (47 per cent) of respondents were considering a change to their DC structure, with Aon noting that around a quarter of employers using other structures were expecting to be in a master trust in five years’ time.

“With the amount of continual change in the UK pension landscape, it can be challenging to prioritise the ‘important’ from the ‘urgent’, and to move from ensuring regulatory boxes are ticked, to focusing on activity that makes the most improvement to outcomes for DC savers,” commented Aon senior partner and head of DC consulting, Ben Roe.

“That’s why it’s encouraging to see the continued prioritisation of understanding and improving member outcomes.

“However, despite this focus on good value from 61 percent of schemes, it is a concern that nearly two-thirds of schemes do not know what this means for the expected pension outcomes of their scheme members.”

Aon’s research found that the median DC default contribution rate remained at around 6 per cent from the employer and 4 per cent from the employee, although it also highlighted a “big difference” between the highest and lowest rates across all schemes.

When looking at investment themes, the study showed that 70 per cent of schemes monitor component fund performance against benchmarks, but only three in 10 monitor what this means for the aggregate performance for a member invested in the default option.

More than four in 10 (41 per cent) schemes assess all their investment options against ESG criteria, while one in 10 were currently investing in illiquid assets.

Aon CIO for DC solutions, Joanna Sharples, stated: “Most DC savers do not make their own investment decisions, which means that the choice of a good default option can make a huge difference to member outcomes.

“The default investment option for pension scheme members needs to get the right balance of target returns over inflation in the long term, versus mitigating downside risks, as well as supporting the way in which members will access their DC pension savings in retirement.

“The gold standard is to monitor default strategy performance against scheme-specific targets for investment returns and volatility. This allows those running schemes to understand how their default investment is performing in relation to delivering a good outcome for their members.

“Only 12 per cent of schemes currently monitor their default investment performance against their own specific return targets and even fewer at 9 per cent, against volatility targets.”

Currently, 35 per cent of DC schemes have a preferred financial adviser firm to support members at retirement, with a further 15 per cent planning to do so.

Most DC schemes reported that less than 10 per cent of members have selected their own target retirement age, although 40 per cent do not measure this.

Over six in 10 schemes have a drawdown option for members, but 25 per cent still had no plans to offer one, despite most basing their default investment on their members accessing savings in this way.

“The use of ‘defaults’ in DC schemes has generally been effective in getting people to save at a basic level in their DC pension through to retirement,” said Aon associate partner, Steven Leigh.

“But currently there is no default decumulation solution, so while the introduction of pensions freedoms allowed savers choice around how they take their DC benefits, it has meant greater responsibility being placed on the individual.

“When the ‘crutch’ of suitable defaults falls away - as it does at retirement when faced with this choice - effective member support is crucial in reducing the risk of DC members undoing years of good work by making bad decisions at retirement.

“It is encouraging to see from the survey that a fairly large proportion of schemes have different types of support in place. This is key as quality support through to retirement will maximise the chances that most members make their own informed choices for better outcomes.”

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