Supermarket Tesco has a new default investment structure aimed at allowing members to access the full range of freedoms in its recently established defined contribution plan, but administrative complexity still holds many schemes back.
The introduction of pension freedoms has raised profound questions about the role of the DC default fund, as the increased options available to members at retirement has made existing defaults less suitable for targeting desired outcomes.
[There’s] innovation in the framework, but not innovation in the administration
Mark Futcher, Barnett Waddingham
Tesco’s Retirement Savings Plan scheme was set up in November last year following the closure of its defined benefit plan. Covering one of the UK's largest private sector workforces, it offers matched contributions of up to 7.5 per cent, and after three months has reached £165m in assets.
The scheme operates different defaults depending on what phase of their career members are in. It also divides the final stage into three defaults to aim members towards a specific outcome in retirement.
The stages are as follows:
Far to go
This is aimed at members with more than 15 years left before their retirement and aims for higher growth.
Middle distance
For members who are between five and 15 years from retirement. This still aims for growth but begins to introduce greater protection.
Nearly there
For members with less than five years to go until retirement. This looks to protect members' savings and help them target a specific retirement outcome.
The scheme has been set up within a mastertrust provided by Legal & General, but the employer has set up an internal committee to improve the governance.
A spokesperson for Tesco said: “Our governance committee meets at least quarterly and is made up of representatives with key skill sets and experience, member representatives and an independent trustee. The trustee oversees such areas as the delivery of investment against its objectives, performance at an asset class and manager level and against expected member outcomes, service to its members and communication and member engagement.”
They added that the committee was intended as a supplement to the mastertrust.
Mark Futcher, partner and head of DC at consultancy Barnett Waddingham, said some employers were using mastertrusts as a form of “regulatory arbitrage” to pass off responsibility for the scheme to someone else. But he said the use of pension committees from the employer were a good way of maintaining focus on scheme objectives.
“Mastertrusts are being promoted as a regulatory light-touch option… People think it’s someone else’s problem,” he said.
“You often see governance committees being set up to make sure… everything’s being well run,” keeping an eye on both the objectives of the mastertrust and those of the employer and members.
Futcher said the creation of default frameworks allowing members to choose a glide path for one of the main retirement options was becoming the norm, but said it was still rare for members to be able to combine strategies.
“[There’s] innovation in the framework, but not innovation in the administration,” he said.
Philip Smith, head of defined contribution consulting at PwC, said lifestyle options carry a certain risk due to their complexity, and companies are looking to reduce the chances of making mistakes with lifestyle options.
“It’s complex to administer lifestyle, so you want to minimise your chances of messing up,” he said.
“It’s an emerging area and the post-freedom products have still got to emerge,” Smith added.
Alex Pocock, head of DC investment at Barnett Waddingham, said target date funds could be used to allow members to combine targets, but added it was an administrative challenge.
“Most admin systems can’t handle overlapping lifestyle periods… let alone those with different dates.”
