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Article | Pensions Briefing

What is going on in the world of savings?

Employers report big plans to review their defined contribution (DC) pension schemes to keep up with changes like freedom and choice

Defined Contribution|Health and Benefits

By Jayesh Patel | November 8, 2018

Jayesh Patel looks at what is actually going on in the world of savings, drawing on insight from the Willis Towers Watson’s FTSE 350 DC Pension Scheme Survey 2018.

Employers do not intend to sleepwalk through the pensions revolution. They report big plans to review their defined contribution (DC) pension schemes to keep up with freedom and choice, as well as the rapid changes that are transforming the modern workplace. Jayesh Patel looks at what is going on in the world of savings.

DC is becoming more important to employers, with auto-enrolment and continued closure of defined benefit (DB) schemes creating an influx of money into DC pension schemes. Millions more people are saving into DC pensions with median annual contributions rising fourfold and the size of DC plans growing fivefold over the last decade within the FTSE 100, according to Willis Towers Watson's FTSE 350 DC Pension Scheme Survey 2018. Although at present, many companies are enrolling employees at minimum contribution levels, employers are considering how to differentiate themselves to attract and retain the best possible talent.

Employers’ plans revealed

Better benefits packages are the first port of call. Around one-third of employers are planning to add to or enhance their financial well-being programmes over the next three years, according to Willis Towers Watson's 2018 UK Pension Strategy Survey. Such enhancements might take the form of help with debt management, education on financial matters or access to short-term savings vehicles to help people reach their financial goals.

Chart showing percentage of employers offering employees flexibility to use the employer's pension contributions for other financial priorities now and in 2 years
Figure 1. Does your organisation give employees the flexibility to use the employer’s pension contributions for other financial priorities or do they have plans to do so in the future?

Source: 2018 Willis Towers Watson UK Pension Strategy Survey.

Employers are also looking to provide additional choice and flexibility within their DC pension plans. At present, only 8% of companies offer savers some pensions flexibility – giving them the option to divert their money into an individual savings account (ISA), for example. However, this figure increases to 30% when companies were asked whether they would look to provide further flexibility in the next three years, according to Willis Towers Watson's 2018 UK Pension Strategy Survey.

These statistics point to an underlying trend. Companies are trying to provide more choices and flexibility, so that they can cater for different generations with varying financial priorities. Employers understand the need for long-term savings, but they also appreciate that sometimes, people have other financial priorities that have to take precedence.

Helping workers to live more comfortably in retirement is another preoccupation for employers. Just under a third said they were looking to improve retirement adequacy over the next two years. Providing support to people as they approach retirement is very important, people are building up sizeable pots and have far more options than they had previously.

This explains why a huge 56% of employers plan to create or enhance the support programmes they have in place to help savers when they reach retirement, according to Willis Towers Watson’s UK Pension Strategy Survey 2018. A considerable proportion (32%) had already made changes to the at-retirement support they offer to members.

There has been a big leap in employers providing guidance to savers, either through their provider or by facilitating access themselves. In 2017, 44% offered guidance; a year later in 2018, the number had jumped up to 61%.

Chart showing the types of retiree withdrawal behavior in your default fund strategy being targeted at retirement
Figure 2. What type of retiree withdrawal behavior is your default fund strategy targeting at retirement?

Source: FTSE 350 DC Pension Scheme Survey 2018.

In the light of freedom and choice and the uncertainty it has created about the decisions that future generations of savers will make, schemes are reviewing the investment options they offer to members. With contract-based arrangements, we have seen a number of plans looking to implement their provider's off-the-shelf default strategy. This has typically been a 'balanced approach', where the provider doesn't know what decisions people will make, so aims to get them into the best possible place given the uncertainty around people's future retirement choices.

The trust-based picture is much more mixed. The number of default investment strategies that target annuities has dropped sharply, and a larger proportion of schemes are targeting drawdown.

In regard to DC vehicles, employers are increasingly turning to master trusts. Use of master trusts leapt from eight percent in 2015 to 20% in 2018 within the FTSE 250. The use of single-employer trusts is declining and was down to 19% in 2018 from 29% in 2015, also within the FTSE 250.

Chart showing the type of vehicles used
Figure 3. Type of vehicle used

Source: FTSE 350 DC Pension Scheme Survey 2018.

The popularity of master trusts is expected to continue. Asked what type of pension scheme arrangement they anticipated offering in three years' time, almost half (41%) of companies with more than 5,000 employees said they anticipate offering a master trust in three years, a sharp increase from the 22% of companies which offer one at present, according to Willis Towers Watson research.

How to plan for the future

Companies which are making plans should think carefully about their ethos and how they want to position their benefits and pensions strategy. There are four key elements to consider. The first is benefits strategy. Questions worth thinking about are: How competitive do you want to be? Is it about aligning your company with its peer group? Do you have a firm belief about improving retirement adequacy? How much flexibility do you want to offer? Would an ISA option be attractive to your employees alongside your pension plan?

The second element is delivery vehicle. Here, what will work best will vary from company to company and thought should be given to the resources available to run the DC plan and how to provide the best value to DC plan members.

Investment is the third key issue. Companies should consider whether they want to design their default strategy and if they have the expertise to do so or whether they might prefer to delegate some investment decisions to a third party.

Engagement is the final element and employees are hugely dependent on receiving information that is easily accessible and understood.

Understanding your current DC pension plan, before considering how it meets your future objectives will help you identify what’s currently missing and move towards filling in the gaps.

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