DC needs careful attention
I am very pleased to see the debate about pension charges hitting the headlines. Not only because we desperately need transparency on annual management charges to avoid a future mis-selling scandal, but also because it means defined contribution (DC) schemes are finally getting more attention.
As Lee Hollingworth, head of DC at Hymans Robertson, says in this month’s cover story: “DC is not set up to deliver value to members at present.”
DC pensions, and in particular contract-based schemes, have been the poor relations to final salary schemes. With the exception of a few best-practice employers, most HR and benefits managers have not really got their
teeth into crucial elements of contract-based schemes, such as investment strategies.
However, I find many HR and benefits managers are aware they should try to understand the investment strategy of their default fund. But the task appears daunting and seems to require a level of investment knowledge they are not comfortable with.
Having spoken to a variety of DC investment specialists, I can say they are able to make the likes of me understand the key concepts of investment. So it is worth taking the plunge.
There is a strong duty of care for the HR department to ensure staff get a good pension. Getting it wrong will lead to a huge risk cost to the organisation. Employees expect their employer to have done due diligence on their benefi ts, including the investments in the pension scheme. If, in future, this is proved not to be the case, there is the potential for litigation.
Also, staff unable to retire because of poor pension investment performance will be hard to deal with in terms of performance management or workforce planning.
Courts are already taking into account the level of pension savings when disputes arise over employers trying to manage older staff out of the business.
With no default retirement age, employers have to work harder to make sure staff are financially secure when they enter their autumn years. In the Employee Benefits/Premier pensions and workplace savings research 2012, published in August, we found just 23% of HR departments take responsibility for default investment options.
Many more need to take up the mantle, albeit in partnership with their adviser.
Debi O’Donovan, Editor, Employee Benefits