Poor investment returns a challenge for DC schemes

Mercer, pensions, Brian Henderson, Defined Contributions, investments

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Contact: Mags Andersen
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Poor investment returns and lack of member understanding are biggest challenges for DC schemes

UK
London, 8 March 2010

Poor investment returns and lack of member understanding are the two most important challenges facing defined contribution pension (DC) schemes, according to research by Mercer. Yet whilst the majority of participating companies intend to focus on improving member understanding, only half intend to improve the investment efficiency of their scheme over the next two years.

Brian Henderson, Senior Investment Consultant and a specialist in DC pensions at Mercer commented: "Beyond the effect of the credit crisis, research suggests that DC underperforms DB for a number of reasons. A clear problem is members' lack of financial knowledge and aversion to risk - leading to poor investment performance over the longer term.

He added, however: "By focusing only on increasing members' understanding rather than also improving investment efficiency, trustees and sponsors might be missing a trick. By refining the funds to improve future performance and simplifying the way they are presented to members, both challenges are met. In doing so trustees and sponsors might even meet a third challenge - increasing member participation."

Fund options
The number of funds offered varies considerably across schemes, with 13% of participating sponsors providing fewer than six funds and 27% offering more than 20 funds. There is a significant difference in the median number of funds offered by trust-based (9) and contract-based plans (46), though this spread has narrowed slightly since Mercer's 2007 survey in which the numbers were 7 and 52 respectively. "This slight evening-out is, in part, a result of greater involvement by trustees and sponsors in tailoring their range of funds to the increasingly varied needs of their members," said Mr Henderson.

Over 90% of companies offer a default fund, compared with 85% in 2007. Lifestyle funds remain the most common instrument and are used by 80% of respondents. Of the sponsors considering adding or changing a default option in the next two years, 76% are looking at lifestyle funds, although there is an increasing interest in other forms of default.

Mr Henderson commented: "For traditional lifestyle approaches, many underlying strategies could be improved, especially during the run up to the protection phase when the members' fund is still invested in risky assets and is most vulnerable to the potential impact of any market falls. Trustees need to focus more on making the default option as efficient as possible to ensure the risks taken by members are rewarded during all stages of growth and protection.

"Whilst derisking is important, it doesn't mean that members should miss out on the investment opportunities to be had. Trustees could review the lifestyle switching period to ensure members get the maximum potential return from their fund," he added.

Notes for Editors
The data is taken from Mercer's 2009 DC survey which looked into the DC pension offerings of 345 UK companies, representing some 1.2m members and £10bn in assets under management.