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Management

Employees fail to value their pension

Tuesday, 08 April 2008

Defined contribution pension schemes cite employee understanding and effective communication as top challenges.

Getting members to appreciate and value their pension is the top challenge facing Europe's defined contribution pension plans, yet only a small proportion currently invest in member education, according to a survey by Mercer. The survey covered 235 organisations across 13 countries.

Financial planning services

When asked to list the top challenges facing their scheme, 6 in 10 companies cited securing 'employee understanding' of their scheme and 'effective communication' as key issues.

Despite this, only a quarter of participating schemes offer financial planning services or investment advice to their members.

Additionally, while over 80 per cent of schemes consider websites and personalised communication important in communicating with members, websites are only provided by just over half the schemes while the majority (80 per cent) still rely heavily on generic literature such as newsletters and brochures.

Tim Burggraaf, a principal in Mercer's retirement business, said that there was a clear contrast between what employers want for their schemes and what is being achieved.

He added that putting resources into improving members' understanding is paramount in order to get them to value the scheme."

"Communication programmes need go beyond simply making information available. They should reach out to meet individual members' needs. A measure of successful schemes is whether their members are sufficiently educated to understand how much to save for retirement,” Burggraaf explained.

Investment

The importance of educating members on their investment choices is reinforced by the large choice of funds presented to them.

Members can choose between an average of 15 investment options, with some schemes offering a choice of over 100.

Yet, for example 42 per cent of schemes do not regularly review the range or number of their investment choices.

Nearly 75 per cent of the participating schemes offer a default investment option, which as many as 70 per cent of members choose.

Burggraaf warned that, with so many members in the default fund, it is important to ensure the design of the default fund option is right for as many members as possible.

“Considering members pick up a large part of the cost of their pension, and also carry most of the risk, it is the employers' responsibility to keep an eye on fund selection and to proactively make changes when investments fail to deliver,” he said.

Governance

Fewer than half of the plans surveyed (43 per cent) formally measure their success factors and as few as 17 per cent document them.

Over two-thirds of plans have no formal objectives or goals and only 26 per cent say a written policy exists.

Burggraaf said that employers need to set clear objectives and policies on delivery to succeed with their plans.

Contributions, benefit levels, investment and operational risk, as well as member communication and feedback, all need to be considered.

He added that regular performance assessments against key objectives and success measures are paramount to keep DC plans on the right track.

"Interestingly, in some parts of Europe new legislation has introduced a level of duty of care for employers. This is reflected in the survey with just under a third of companies surveyed taking a paternalistic approach to their plan and claiming to proactively work towards ensuring members have sufficient income in retirement,” Burggraaf said.

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