Other issues
Providing enough protection against volatility as the member gets closer to retirement is also important, as well as managing inflation risk, she adds.
More effective engagement can help bring members into a discussion about whether their pension pot is high quality and providing value.
Blyth says: “A scheme, for example, could explain to its members what the investment strategy is designed to achieve and then tracks whether it is meeting this expectation.”
This type of engagement can help the member to feel ownership of their pension pot.
“Engagement could also help to nudge members into contributing more to their pension pot each time their salary goes up by showing them how it will improve their retirement income levels,” she adds.
As savers get closer to retirement, this approach can also help to show members the benefit of a diversified investment strategy.
“They would be able to see the importance of keeping a lid on volatility to protect the value of their pension pot,” Blyth says.
The benefit of an effective member engagement strategy shows how delivering value for scheme members is about more than just a high-quality investment strategy.
To ensure members have the best retirement outcomes, a scheme must also be well-administered and have an effective engagement strategy. While there has been plenty of scrutiny of investment management fees, there has been relatively little consideration of administration costs.
Effective administration is boring but vital. It’s boring because it a necessary service yet if it goes wrong, it can quickly spiral into a crisis. And administration is becoming more challenging. For master trusts like Nest and the People’s Pension, reducing administrative fees is difficult because they have a large number of members with small pots.
The more peripatetic nature of work also creates challenges. It’s easier to administer a scheme when a large number of members stay in one job for many years; it’s much harder when there is a higher turnover of staff.
As the number of jobs worked in one lifetime increases, so does member churn. Pension providers need to walk a difficult administrative tightrope. There’s no point in spending too much on this service as it’s hard to see what additional benefit it would create, yet they must ensure they do not under-invest as that could spark a crisis.
The challenges faced by administrative costs and effective engagement show how many working parts there are to a DC scheme.
Blyth concludes: “The investment strategy is only one part of the value proposition: all the other elements of the scheme help a member achieve a good outcome.”
