EXCLUSIVE: DHL is overhauling the default fund for members of its trust-based defined contribution (DC) pension schemes as part of efforts to reduce risk and achieve better returns for medium earners.
But its changes to the default fund, which would limit its exposure to equities, have stalled because of the latest crash in the financial markets caused by the eurozone debt crisis. Ray Martin, vice-president of pensions at DHL, said: “We were pretty close to implementing something when the markets crashed in August. Our default fund is in equities, but that is too risky for our lower-paid members.
“We want to use a lower-risk approach, but we are still deciding how to implement the switch. We do not want people selling equities at the bottom of the market.”
DHL, which has 60,000 staff in the UK, has also researched and modelled the returns members can expect from their investment choices, which may fall into low-, medium- or high-risk categories, according to their earnings. Its analysis concluded that a low-risk strategy was suitable for lower earners, but would not achieve maximum returns for those earning £30,000 a year or more.
If an employee gets to the point where they are earning £30,000 and are in a low-risk fund, DHL will warn them that this might not meet their retirement expectations. Martin said: “For the higher paid, the state pension is less significant, so they need to save more to get the same [income] replacement ratio.”
DHL’s focus on managing risk in relation to its default fund follows its decision in 2009 to consolidate several defined benefit (DB) and DC schemes, acquired through acquisition, into a master trust arrangement, which allows the risk to be spread. All pension scheme assets are mingled in the trust, enabling DHL to negotiate competitive rates with its fund managers. DC scheme members are charged only 10 basis points for investment management.
Overall, this risk management approach has given its schemes good protection against the latest stock market crash. This was achieved by moving assets out of equities and mainly into government bonds, corporate bonds and swaps. “Our liabilities have not changed and our assets have not fallen as much as everybody else’s because we are out of equities,” said Martin. “Our risk manager varies our exposure to markets depending on what happens.”
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Read more about defined contribution (DC) pensions