The growth of Defined Contribution pension arrangements

There are few that would disagree with the view that Defined Contribution (DC) pension arrangements will be the main source of work place pension arrangement going forward.  Membership of schemes is also likely to increase as the new government has confirmed a commitment to auto-enrolment, although news is still awaited on NEST (the National Employment Savings Trust)

Our experience is that employers and trustees are starting to recognise that DC should be high on their agenda.  However, as the focus turns to DC issues, the particular risks attached to DC should be addressed to ensure the provision of a benefit that is valued by members. 

Maximising the value of Defined Contribution

The essential ingredient to maximise the value of DC is an understanding of the risks, once understood and taking appropriate action to mitigate those risks. 

We recognise DC risk under the following headings:

• Choice – This includes questions such as ‘Are the right funds available to the members?’  ‘Is the default fund appropriate for the membership?’  ‘Is the investment strategy reviewed at appropriate intervals?’
• Contribution rate – As well as considering the requirements of auto-enrolment, the contribution rate needs to be reviewed in the context of overall remuneration strategy
• Charges – The level of management charges are an important factor, but the investment risk and returns on individual funds must also be understood
• Communication – How is it ensured that members are advised of the key features of their arrangement, the choices that they have and, perhaps most importantly, how are their expectations managed?

In future editions of Trust e-matters we will explore each of these areas in more depth.

But as well as striving to provide a valuable benefit, trustees and employers should be aware of  the Pensions Regulator’s focus on DC provision.

The message from the Pensions Regulator

The Pensions Regulator is highlighting the need for DC arrangements to meet the needs of members.  Recent activity includes:

• chairing the Investment Governance Group (IGG) to develop best practice DC investment decision making
• promoting improvements in standards of administration in DC schemes. This links into the revised guidance on record-keeping (see the separate article ‘No excuses for not getting the record straight’ in this edition of Trust e-matters)
• highlighting the impact of some key governance practices in both trust and contract-based arrangements.

An update from NEST

Although the new government has still to make any formal announcements on NEST, earlier this year we provided an update on the proposed reforms.

We will keep you updated on developments as they take place.