Half of DC pension schemes driven to help employees retire at reasonable age

dc schemes retirement

Almost half (46%) of defined contribution (DC) pension schemes are primarily driven by the aim to provide sufficient pension funds for employees to retire at a reasonable age, up from 29% in 2020, according to research by Aon.

Its 2022 DC pension scheme and financial wellbeing survey, which surveyed schemes collectively holding more than £35bn in assets for upwards of half a million members, working across a wide range of sectors, also found that the default target retirement age for the majority (92%) of schemes was 65, with only a small proportion aiming for either 60 (6%) or 65-plus (2%).

The second main driver at 28% was to provide a pension benefit largely in line with that of competitors, down from the top spot (44%) in 2020. Only 17% of schemes were driven by the need to offer a market-leading benefit, dropping from 19% in 2020, and 5% said they simply do the minimum to comply with regulations.

Sign up to our newsletters

Receive news and guidance on a range of HR issues direct to your inbox

This field is for validation purposes and should be left unchanged.

The majority (86%) of schemes outlined a key objective of offering good value for members, with better member outcomes (75%), specific communication or engagement objectives (62%) and improved governance (43%) also driving schemes. Only 5% said they did not have any specific objectives for their DC plan.

Almost half (48%) of participants were looking to change the structure of their DC scheme. Among this group, some of the key reasons included governance requirements (27%), better member outcomes (25%) and the cost of running the plan (22%).

Schemes were found to largely be spending an appropriate amount of time on administration (77%) and investments (72%), but wanted to spend more time on communicating with employees (61%%) and strategy (43%).

Average default contribution rates remained steady at 6% for organisations and 4% for employees. The majority (71%) of businesses provided matching contributions, with only small proportions offering alternative arrangements such as flat rates (12%), age-related (2%) or role-related contributions (2%).

For 78%, matching contributions were seen as a way of encouraging employees to save more. The majority of members (71%) were found not to have set a goal for how much to save for retirement.

Half of respondents confirmed that they offered different contribution structures for different groups, including different business units (16%) and those with legacy contribution structures (17%).

Almost two-thirds (63%) of respondents answered ‘do not know’ when asked whether they knew the expected outcome for a lifetime member of their pension plan, while only 19% said that the sponsoring employer considered pension outcomes in relation to its future workforce planning.

In terms of investments, 93% of DC pension schemes monitor the performance of individual funds against benchmarks, while 32% monitor overall aggregate performance as experienced by a member in the default option.

Two-fifths (42%) of schemes now assess all investment options against environmental, social and governance (ESG) factors up from 10% as recently as 2020. Meanwhile, 56% of respondents had selected one or more ESG options for members to choose voluntarily. Only 6% had no plans to offer ESG options to members.

While 38% already offered targeted education or communication around pensions, 44% said they planned to do so in the next two years.

Key factors respondents considered in their pension communications were current savings rates (67%), time to retirement (66%) and the most appropriate delivery channels (56%). However, 20% said they have no plan at all for their pension communications.

In terms of assessing employee engagement, 80% said they used proxy measures, such as how many members access websites and online tools, while 35% assessed whether individuals were saving enough.

At retirement, 67% said they offer access to an annuity broking or retirement guidance service, 46% offered pre-retirement workshops, 48% had a preferred financial adviser, 37% allowed members access to an allowance to pay for financial advice, and 10% provided online robo-advice. Almost half (46%) offered a preferred drawdown solution for members, while 21% said they plan to offer this within three years.

Benjamin Roe, head of DC consulting at Aon, said: “The last two years have been challenging for everyone and, understandably, pension schemes have not always been at the forefront of people’s minds. This does not diminish the importance of work being done by the custodians of the finances and future wellbeing of the millions saving for retirement through their workplace pensions, as well as the dedication of all those on the operational side who have ensured that the pension system continues to function.

“More respondents than ever selected providing a sufficient pot for members to retire with as their main driver in running their schemes. I also saw a growing recognition that monitoring and influencing outcomes is as important, if not more so, than measuring inputs across areas such as contribution take-up, communications and investment performance. This is a really positive direction for DC pensions, as the management of schemes evolves to consider what members will receive in retirement.”