Employees destined for low levels of pension income from DC plans - Deloitte DC Pension Scheme Sponsor Survey 2011

One third of employees have requested that their employers (DC scheme sponsors) either reduce or cancel their additional voluntary contributions to their defined contribution pension scheme since changes to tax relief on pensions contributions were announced, according to the Defined Contribution (DC) Pension Scheme Sponsor Survey 2011 by Deloitte, the leading business advisors.

The survey findings also show that employee engagement with their pension scheme is low. 36% of scheme sponsors think employees’ level of understanding and knowledge is poor. Of these, 77% believe employees are not interested in engaging with the planning process.

The survey examined a number of areas including plan design, investment and administrative practices, charges, provider relationships and plan effectiveness.  While much attention of scheme sponsors and regulators has focused on defined benefit (DB) pension schemes, little attention has been focused on the effectiveness of DC pension schemes, which are now the primary pension vehicle for the majority of those private sector employees who are fortunate enough to have any supplementary pension provision.

In addition to low employee engagement, a number of the survey findings are alarming, including:

• The average employer contribution rate for 67% of respondents is between 5 and 10% of salary. Contribution rates to DB schemes are typically double this range.
• Asset performance is as critical as contribution levels in achieving a successful outcome at retirement, yet over a quarter of respondents do not have a formal timetable in place to evaluate and benchmark the performance of the plan’s investments, and only 47% carry this process out annually.
•  53% of those surveyed had reviewed their investment policy within the last year, and a further 39% have reviewed it within the last three years. However, 51% of respondents have never replaced an investment fund due to poor performance – this after a decade where the typical managed fund has produced virtually no investment return whatsoever!   

Commenting on the findings of the survey, Patrick Cosgrave, Director, Deloitte Total Reward and Benefits commented: “Based on these results, it’s clear that many employees are destined for low levels of pension income from their DC plans, unless they significantly increase their rates of personal contributions from existing levels. 

“While a significant responsibility for DC pension planning lies with employees themselves, scheme sponsors and trustees have a pivotal role to play to ensure that their scheme design continually evolves so that it remains fit for purpose. 

“When asked on their obligation to prepare people for retirement, 37% of respondents stated that they feel their only obligation is to offer a competitive plan. We would be encouraging employers to take a more active role in helping employees achieve an adequate outcome at retirement.”

Cosgrave continued: “Markets remain extremely volatile, and so it is extremely important that investment strategies are reviewed regularly to ensure that they are delivering anticipated benefits for members and level of risk are appropriate. One would certainly have expected to see some more action around management of investment risk to insulate plans against such volatility.”

On a positive note, there is little evidence from the survey findings to suggest that sponsors are restricting eligibility to DC plans, despite the consistent pressure on companies to reduce costs. Matching schemes, where employers match employee contributions up to a specific level, are popular, with the most common matching formula being equal matching by the employer of the employee contribution up to a maximum of 5% of salary.

However, it is questionable if this is a sufficient level of contribution to provide adequate levels of salary replacement through the pension at retirement.

In terms of the relationships that scheme sponsors have with their providers, the findings show that sponsors appear to be loyal to their scheme providers. 

34% of respondents have been with their current provider for between five and nine years, while an additional 26% of them have maintained their provider for ten years or more. 

Only 12% of respondents have been with their current provider for less than two years. However, one quarter of respondents indicated that they are currently considering changing provider or planning to evaluate the marketplace in the next twelve months.

“In the current economic environment, employers increasingly need to look on their pension spend as an investment in their workforce as, interestingly, over half of respondents reported they do not feel their DC plan is an effective recruitment tool or that it assists in retaining employees. It’s clear that sponsors have not been overly eager to look at changing their scheme design but ignoring their DC pension scheme provision is not the answer. 

“Failing to pay adequate attention to governance and supplier management will leave scheme sponsors and/or trustees exposed to potential claims by scheme members through their inaction. However, this may well be set to change. We anticipate that the key driver in the evolution of scheme design will be the effect of the change in the qualifying age for the state pension, which will ultimately rise to 68 by 2028. 

“As the favourable tax treatment of pensions is gradually being eroded, scheme sponsors will need to explore more innovative ways to maximise the potential for retirement savings to attract and retain key employees,” concluded Cosgrave.

About the survey
Scheme sponsors completed the survey in April 2011. The majority of respondents in this year’s survey were in two sectors consumer and industrial products/services and financial services/insurance, followed by just over 21% in various sectors such as retail, ecommerce, transport and logistics, publishing, education and commercial semi-state bodies. Over 70% of respondents were scheme sponsors with either up to 50 employees or between 51 and 200 employees. Most of the scheme sponsors surveyed were small to medium size schemes. The vast majority (almost 90% of active members) fell into the 1 to 50 or 51 to 200 member size scheme.

About Deloitte
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The information contained in this press release is correct at the time of going to press.

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