Willis Towers Watson has published a report looking at DC trends over the past year. Kim Kaveh looks at the findings.
Leading defined contribution (DC) schemes are beginning to differentiate in areas that will make delivering long-term sustainable retirement outcomes a real possibility, according to Willis Towers Watson.
The consultancy's 14th annual defined contribution (DC) pension scheme survey of 239 FTSE 350 companies - revealed exclusively to PP today (11 September) - showed contract-based, trust-based and master trust schemes have made big improvements this year.
One of the most significant findings was that there has been a surge in FTSE 350 employer contributions - currently set at a 3% minimum for employers under UK law, and a minimum of 8% in total.
The survey - conducted last month - found FTSE 100 average employer core contributions, including matching and non-matching contributions, increased to 7.1% on average from 6.4% in 2018, while FTSE 250 firms increased contributions to 6.1% from 4.3% last year.
Broken down, the data showed matching employer core contributions of FTSE 100 schemes had increased from 5.5% in 2017, to a steady 5.6% in 2018, and jumped to 6.5% this year. In the FTSE 250, this had increased from 4.4% two years ago to 4.9% last year, and jumped to 6% in 2019.
While non-matching contributions also increased among the FTSE 250 firms, from 5.2% in 2017 to 6.1% in 2019, the same did not correlate in the FTSE 100, where there was a drop from 9% in 2017 to 8.3% two years on.
However, some FTSE 350 firms said they plan to review contribution rates in the next two years. Among firms in the FTSE 100, 48% said they had taken action on contributions in the past two years, and 33% said they are considering action in the next two years. For the FTSE 250, 62% said they had taken action in the past two years, and a third were considering taking action.
At the same time, executive pension contributions had decreased among the FTSE 350, with 45% of FTSE 100 companies reducing pension contributions of their directors, while this was the case for 30% of FTSE 250 firms.
Willis Towers Watson senior consultant Richard Sweetman says: "Historically, the contribution levels haven't changed materially over the last ten years or so. They've been gradually increasing incrementally, but there's been no real step change until this year where we did see, for the first time, in a long time, a step change.
"With a survey of this type, we don't interrogate individual responses that much, but our interpretation of the findings is that the final stage of phasing for auto-enrolment (AE) has had that impact."
AE reached the end of its staged phasing in February last year, and most recent government data shows over 1.5 million employers have confirmed they have met their duties by completing their declaration of compliance since AE's introduction in 2012.
Sweetman adds that, in terms of the executive rates, "There has been increased pressure from investors to align executive pension contributions to those provided to the wider workforce. There have been a number of FTSE 100 companies responding to this over the last year, particularly for newly appointed executives".
The Financial Reporting Council revised its UK Corporate Governance Code last year for listed companies, making specific recommendations in relation to directors' pension provision. In particular, it stated that pension arrangements should be aligned with those in place for the wider workforce.
Willis Towers Watson's survey also found that 62% of DC schemes are looking to incorporate, or continue to include, ESG in their default strategies over the next couple of years. Furthermore, two-thirds had already added, or were considering adding, ESG funds as a self-select option.
Contract-based schemes had less of a focus on ESG than trust-based schemes and master trusts; just 6% had a continued focus on ESG in the default and the same proportion had ESG "already in focus". Among master trusts, this rested at 17% and 8% respectively, and for trust-based schemes these figures were at 18% and 14% respectively.
The analysis also found that 54% said they plan to review their investment default as whole. Over a fifth (22%) of FTSE 350 firms allowed employees to divert some, or all, of their pension contributions to alternative savings options, such as ISAs or investment accounts.
To reach its conclusions on the investment side, Willis Towers Watson asked the employers what type of scheme they had, and then asked them subsequent questions about their investment default. Some of the firms using master trusts, for example, had their own default rather than using an off the shelf offering.
DC investment director Anne Swift says she was "really encouraged by the level of engagement already on ESG issues".
She notes: "I'm not surprised that there's more focus by trust-based schemes because, obviously, they have certain requirements now in terms of their statement of investment principles, so they certainly can't ignore it.
"Employers using contract-based schemes are much more reliant on what the provider is doing and what they're offering. So it will certainly be interesting, when we do the survey next year, to see how these scores develop."
Regulations coming into force in October this year will require trustees to disclose their policy on financially-material considerations including ESG matters such as climate change risk.
Sweetman says this is only the start of the DC journey. "In DC pension provision, the investment area is one that will evolve as schemes get bigger, you get those economies of scale, and you're able to do more sophisticated things. I think we'll see quite a lot of innovation in the DC investment space."
Master trust usage
Master trust usage had also increased among FTSE 100 firms. Just over a fifth of FTSE 100 firms said they use a master trust arrangement for their employees, up from 15% last year.
For FTSE 250 firms the numbers were roughly the same at 19%, down from a fifth last year. However, master trust usage has increased by six percentage points since 2017.
This could also increase further in next year's survey and beyond. Nearly half (48%) said they plan to review their DC vehicle in the next two years among the FTSE 250, while 36% of FTSE 100 firms said they are considering action in the next couple of years.
Master trusts have been undergoing an extensive authorisation regime since last October, which will conclude before the end of this year. So far 27 schemes have been approved by The Pensions Regulator, including NEST, while 12 are still awaiting their fate.
Sweetman says: "It might be that quite a lot of those organisations are looking at it [moving to a master trust], and they just haven't yet fully implemented it or they've made a decision, but it hasn't been launched perhaps. So I think it's just one to watch."
This year's DC investment survey has shown some positive trends overall. It will be interesting to see if contributions see another big jump next year, whether the take up of ESG in default funds increases, and how the adoption of master trusts unfolds once the authorisation regime concludes.
Salvus Master Trust’s funds under management have surpassed the £200m as it continues to wait for authorisation from The Pensions Regulator (TPR).
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