What we can learn from DC in the US

According to OECD data, the US has $15.8tn (£12.3tn) in defined contribution and personal pension assets — seven times the total UK pension market.

The goals of providers and sponsors are aligned in encouraging better retirement provision, improved financial planning and adoption of appropriate asset allocations — which are the same objectives found in the UK.

The challenge, or opportunity, for companies is to determine how to provide effective support for the different needs of employees

So what are the key developments in the US and what best practices could translate to the UK market?

Encourage increased contributions

The US is increasingly adopting auto-enrolment in pension plans, which is already a UK requirement. In the US, however, they have included two twists to encourage increased savings rates:

• Increasing the default savings rates at annual enrolment in excess of the minimum or current rates. Research based on 22,200 corporate DC clients shows that few participants reduce the suggested rate and that average contribution rates have increased.

• Introducing an automatic increase provision in employee contributions as a default each year. Seventy-four per cent of our clients have adopted AIP and evidence is that contributions have increased.

Such design features can be translated into many UK pension schemes, particularly where organisations offer an element of annual enrolment. These actions, supported by modelling tools, enable individuals to understand the impact of improving their retirement savings, while underlining the value of the pension scheme. 

Focus on financial well-being

Although the increased participation rates seem encouraging, it is clear that these overall trends are not being replicated across all generations. Specifically, almost two-thirds of millennials say their main financial concern is having enough funds to meet unexpected emergencies. This contrasts with half of baby boomers who are worried about when they can retire.

For organisations, it is therefore impractical to purely focus on encouraging retirement saving when employees may be struggling with day-to-day finances. The challenge, or opportunity, for companies is to determine how to provide effective support for the different needs of employees.

This has led to the integration of retirement communications into a more comprehensive strategy for engaging with and providing support for employees’ financial concerns.

Developing financial wellness programmes as part of a rewards strategy across the spectrum, from debt management to retirement planning, is beginning to show benefits in employee financial well-being, with the World Economic Forum suggesting it also improves productivity.

Financial well-being programmes including retirement, are increasingly being adopted and deployed by UK organisations, and this trend is expected to continue to accelerate.

Retirement education

In the era of big data, new ways are being found to make communications and employee interactions more personalised.

This is an area which will continue to rapidly evolve, facilitating the ability, for example, of individuals to benchmark DC balances and contribution rates against people of similar age, industry and profile. It makes information personal and enables them to make informed decisions.

While such insights are helpful for participants, it also provides value to the company, ensuring they are identifying areas to improve communications and interactions to enhance employee engagement.

However, with such a fast-moving marketplace, the use of data is an area which should be monitored for innovation to further enhance benefit practices.

The key action is to explore how the data that benefit providers hold can be used to support employees through the provision of tailored and relevant benchmark data, and to review how that supports the broader business objectives.

Mark Sullivan is global practice lead at Fidelity Investments Benefits Consulting