By Ashish Kapur
Good pension scheme governance is risk based and can help to minimise the potential for future problems. It can also assist in building trust among scheme members, encouraging them to save more for their retirement.
This article describes three steps to successful DC pension governance that may yield better outcomes for both scheme members and employer.
1. Investment governance – set a benchmark for your default strategy
More than 80% of DC scheme members are likely to invest via a default investment strategy[1]. But for decades, the average default has remained a lifestyle strategy, whereby members’ monies are invested in an equity fund until they reach five to 10 years from retirement at which point they are de-risked into bonds and cash. This tends to ignore the risk profile of the membership, the level of contributions being made, and thus the ultimate financial outcomes.
Accordingly employers and trustees should not only focus on the design of the default, and consider utilising investment options that better reflect the scheme member demographic, but also establish a target against which they can continually measure the investment performance and suitability of the default. With greater flexibility in retirement arising from the changes announced in the 2014 Budget, now is an opportune moment for employers to undertake such a review.
2. Communications governance – utilise member data in an effort to improve engagement
Investors’ attitudes towards retirement savings evolve over time. To reflect this there are now administration systems available that can assist in providing members with appropriate and timely information on their pension scheme arrangements as their circumstances change. Examples may include an email or information pack asking members to re-examine their nominated beneficiaries following a change of marital status, or one encouraging them to review their investment strategy and retirement plans as they approach retirement age.
By targeting specific groups with relevant messages trustees can help guide members towards making decisions that are appropriate to their needs and aspirations.
3. Operational governance – monitor the trustees
In 2013, The Pensions Regulator issued a DC Code of Practice and accompanying guidance, “to help Trustees meet the standards of practice that we believe form the basis of quality governance and administration in occupational defined contribution (DC) trust-based pension schemes.” These documents cover a wide range of topics and have intensified the pressure on trustees by requiring to them to devote additional time to reading, understanding and applying the rules. Independent trustees can assist trustees in this regard by bringing up-to-date knowledge and the experience that comes from managing a large number of schemes, together with an independent view. This can include ensuring the trustee board remains apprised of the latest industry developments, monitoring the effectiveness of investment advisers, as well as identifying gaps in trustee knowledge to steer future training programmes.
Help is at hand
Many schemes will recognise the intrinsic value of implementing the measures suggested in this article, but are prevented from doing so owing to a lack of scale and resources. This has prompted a growing demand for master trust solutions which enable employers to outsource responsibilities to an independent trustee body. Within a master trust arrangement, customised investment and default funds can be set up and targeted to scheme specific needs and employee profiling, together with administrative and member communications.
A master trust may be the right solution for employers looking to provide, rather than merely facilitate, improved retirement outcomes for members whilst alleviating the burden of internal governance.
Ashish Kapur is European head of institutional solutions at SEI
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