The management of defined contribution pension (DC) schemes is woeful, everywhere. Or so says a global survey of the DC pensions world by Mercer Human Resource Consulting.
“While plan management practices undoubtedly fulfil minimum regulatory requirements, many fall short of what is needed to meet employer and employee expectations,” says the consultant. “The areas of weakness include the monitoring of benefit adequacy, qualitative review of investment managers, service standards for administration, and member education. It was also found that the majority of organisations do not have written policies or objectively monitor the success of their defined contribution plans.”
Overall, the Mercer study revealed wide variations in the development of DC plans. They range from newly-emerging plans in Germany and the Netherlands (which offer limited investment choice and governance practices) to more refined schemes in Australia and the US (which provide stronger governance and monitoring, and high levels of member education and choice). Plans in the UK and Ireland, says Mercer, fall between the two extremes.
The survey of 1,655 organisations across 10 countries showed that 28% of plan sponsors in the US review the adequacy of benefits less than every three years, or not at all. In Canada, Ireland and the UK, the number rises to nearly a half (48%, 49% and 50% respectively).
A similar disparity of practice was noted in the frequency of investment reviews. Reassuringly, over 90% of respondents said they review investment performance annually. However, reviews of qualitative factors, which are likely to drive future performance, were much more varied. Only 30% of UK participants said they conduct annual qualitative reviews of their investment managers. This compares with 48% in Ireland and 75% in the US.
“With the downturn in investment markets, organisations should be reviewing their investment managers’ strengths and weaknesses and the projected adequacy of benefits to ensure their plans continue to be on track,” says Jonathan Gainsford, European Partner at Mercer Human Resource Consulting. “If not, as a minimum they should communicate the change in expectations to employees so they can decide whether or not to increase their contributions. Without this action, employees will have unrealistic expectations that ultimately present a risk to the sponsor.”
The survey also revealed that many organisations have not established service standards with their plan administrators. The proportion varied from a quarter (24%) in Australia to just under half in the UK and USA (49% and 48% respectively) and as many as 70% in Ireland. “Inaccurate or late information can seriously undermine employees’ confidence in the plan and reduce its perceived value. More than this, if money is invested in the wrong place, or invested too late, employers could face claims for compensation,” says Gainsford.
Fewer than 1 in 3 of the respondents (29%) provide investment advice to their employees. Some 27% are considering making this available, while 44% indicate they do not plan to offer it at all. Organisations that rate their plans as highly successful are more than twice as likely to have an educational approach to member communication than those rating them as only somewhat successful.
“In moving from defined benefit to defined contribution plans, employers are passing the financial risks onto employees,” adds Gainsford. “In doing so, they should ensure employees clearly understand the implications of this and are well equipped to make suitable choices. Successful DC plans implement communication programmes that go beyond providing information, and offer genuine education.”
Mercer’s research also revealed that the majority of plan sponsors do not use objective measures to determine the success of their plans, but use anecdotal evidence instead. In Ireland and the UK, only 18% and 26% of respondents, respectively, formally measure whether their plans are successful compared to 53% in the US and 56% in Australia.
“The management of DC plans remains largely without clear, fact-based evidence to confirm they are meeting business objectives. This is surprising, given the enormous investment in retirement plans that many companies are making, and strict governance requirements in other areas of business operations,” says Gainsford.
Only half the respondents surveyed (49%) have a written policy setting out the goals and objectives of their DC plan. Australian companies are most likely to maintain written policies (73%) compared to those in Ireland and the UK which are least likely to (24% in each case). The proportion in the US is 41%.
The survey also shows it is successful plans that are more likely to have a disciplined approach to managing and monitoring their plan. For example, organisations that rate their defined contribution plan as highly successful are almost three times more likely to have documented goals and objectives as those only rating them as somewhat successful.
Overwhelmingly, the most important success factor for DC plans is their value to employees – as cited by 8 out of 10 participants world-wide. “Many organisations have so far struggled to identify and implement a programme to achieve this,” comments Gainsford. “As well as controlling risk, organisations can improve performance and increase employee appreciation through a more disciplined approach to managing their plan. This should identify the plan’s objectives and include a process for evaluation and continuous improvement. The vast majority of defined benefit plans have a rigorous management programme in place. But many defined contribution plans, while fulfilling the regulatory standards, fall short of meeting the expectations of members and sponsors. Failure to have an effective management regime could leave plan sponsors exposed to legal challenge and damage to their reputation.”
Under-performing assets are the main concern for DC plan sponsors in all the countries surveyed. “With the current volatility in global markets, it’s not surprising that low investment returns are the top concern for plan sponsors, regardless of geography,” concludes Gaimsford. “Many are looking to tackle this by addressing problems of low participation and contribution rates, inadequate investment offerings and inappropriate use of investment options.”
The following tables are attached:1. How DC plan success is determined (measured v anecdotal factors)2. Frequency of reviews of benefit adequacy, by country3. Prevalence of investment reviews at least annually
The research covered 10 countries where defined contribution (DC) plans are already established or emerging: Australia, the US, Canada, Brazil and six European countries – Germany, Ireland, Netherlands, Spain, Switzerland and the UK. A total of 1,655 organisations took part, including 400 from the US, 378 from the UK, 310 from Canada, 231 from Australia, 152 from Brazil and 75 from Ireland. The participant organisations represented plans with more than 7 million members and over US$ 270 billion of assets. Data is not included in some assessments where participant numbers from certain countries are low.