Bank of America Merrill Lynch UK Pension Plan has upped member engagement through online tools that enable workers to make changes to their pension plans, to give them greater certainty over their retirement income.
The scheme wanted to ensure the predominately defined contribution workforce were making appropriate contribution and investment decisions, as well as knowing how they could withdraw money at the time of retirement, said Skip McMullan, chair of the trustees of the plan, at the National Association of Pension Funds Investment Strategies Conference.
The reason that we do this is to try to give members some certainty over what they are going to get
“We wanted to try and avoid the situation that many people in DC find themselves, which is that members effectively make a default joining decision, make a default contribution and then make a default investment decision,” he told delegates.
The scheme wanted to find out more about its individual members and make them keen to engage in investment decisions by developing better member communications.
“Everyone effectively knew where they are now but they didn’t have a view on where they needed to get to and an end point,” McMullan said.
“We really wanted to make sure members had the tools available to them to get to that end point,” he added.
The purpose of this is to provide members of the DC scheme with a smoother path to retirement.
Crucial to this was finding a way to move from return-seeking assets to matching the portfolio as efficiently as possible, said Nico Aspinall, head of UK DC investment consulting at Towers Watson, who advised the scheme through the transition.
“The reason that we do this is to try to give members some certainty over what they’re going to get and give them some liquidity,” Aspinall said.
To do this it is vital to find out about the needs of individual members, he added.
Tailoring your scheme
BofA used software to gather member data such as age, postcode and how much they were contributing each month.
“What was interesting was that the workforce in Chester – a call centre workforce with a salary of around £25,000 a year, compared with salaries in the city of perhaps £75,000 to £100,000 – they were actually proportionally putting away more money each month and making active decisions,” McMullan said.
The scheme was then able to come up with three or four different employee profiles, defined by variations of factors including age, location or risk appetite.
An analysis of these profiles showed that employees fit into three broad categories: default investors, guided selectors and true self-selectors – typically older people with greater risk tolerance.
The scheme then developed three different lifestyle funds: cautious, balanced (the default fund) and adventurous.
“The beauty of this technology was... we were able to see what people did as a result of the changes we made,” McMullan said. “It was pleasing to see that people were choosing to go into the balanced lifestyle fund."
The scheme also started derisking members’ investments 25 years before retirement, rather than the typical 10 year period.
Real-time management
Members can make changes to their pension plan via online tools.
We really wanted to make sure members had the tools available to them to get to that end point
“The system is automatic; if you change your end retirement age it will automatically change the assets that are in your particular profile,” McMullan said.
As part of a financial institution, the scheme’s members are used to straightforward processing, he added. They want to see the consequences of their actions immediately.
When members make an online adjustment in their retirement plan they receive a message saying their request has been received and they will see the results of the change the next day.
Another benefit of allowing members to manage their plan online is they can access it at any time and test at home what their current investment strategy and contribution structure might result in according to any chosen retirement age.
Member engagement has risen in percentage terms from the low single digits to around 40 per cent, according to McMullan.
“We take the view that people shouldn’t be frightened about complexity. People should be able to do pension planning if they are given the tools to do it,” he said.
