News analysis: London & Quadrant Housing Trust has commissioned a further review of its defined contribution strategy after an earlier member segmentation exercise led to cost savings and lower risk for members.
Segmentation exercises have seen increased interest from DC schemes, but consultants say trustees should not view such moves as a one-off event.
The roughly £20m L&Q scheme carried out the exercise in 2012, ahead of its auto-enrolment date, and found stark contrasts in the expected success for different sections of the membership.
Richard Butcher, independent chair of the trustee board for L&Q, said: “The lower earning quartile [of the membership] were actually getting a good deal.”
The default investment you build could be different from the one you build for three years' time
Andrew Cheseldine, LCP
He added that the higher level of the state pension as a proportion of income for the lower earners boosted their expected replacement rate – the proportion of their final salary that their pension pot could afford to replace.
Butcher said this led the scheme to invest more conservatively for that section of the membership, to increase the certainty of their level of pension.
“When we set out the investment default we could afford to take less risk at that end of the scale,” he said, adding: “We don’t need to spend a lot of our communication budget on those people. [They] are doing largely the right thing, by design or by default.”
However, the scheme learned higher earners had more ground to make up to meet their expected levels of income at retirement. To counteract this, L&Q biased its communication towards them.
Ripe for review
This led to the scheme initiating a review in spring this year of its contribution rate structure, to determine whether scheme design is incentivising the right contributory behaviour.
Butcher said: “It’s part of a series of incremental work programmes we’ve been rolling out to up our DC offering.”
Andrew Cheseldine, partner at pension consultancy LCP, said schemes should not view segmentation exercises as a one-off, but rather continually monitor member outcomes and make adjustments.
“You need to think about what kind of benefits people will get at retirement,” he said. “The default investment you build could be different from the one you build for three years’ time.”
Tools for the job
Tools for segmenting membership have been growing in popularity. Lee Hollingworth, partner at Hymans Robertson, said L&Q’s segmentation approach is increasing among DC schemes.
“We’ve used the analysis to segment [members] by projected pot size, [then] segment them into different strategies and default them,” he said.
Segmentation strategies are beginning to evolve, Hollingworth said, to take into account the decumulation phase.
“In the ‘spend’ phase of retirement, what you’re looking to do is manage the fund you’ve built up,” he said. “...You need to combine longevity assumptions and the risk profile you need to take to maintain that lifestyle.”
