Less than third of schemes regularly track individual fund performance

Defined contribution schemes must start targeting retirement outcomes over outperforming indices, Aon said in response to its survey of 109 UK DC schemes.

In contrast, 90 per cent of schemes are using an index-based perspective for monitoring performance against market indices and benchmarks. 

Even fewer schemes — 15 per cent of respondents — monitored performance in the context of how it delivered objectives tailored for individual members.

Aon said that investment approaches need to be updated.

Commenting on its findings, Chris Inman, head of DC investment advisory at Aon, said clarity of direction was needed in the space to help avoid member outcomes being overlooked.

“While the concept of a good outcome is generally recognised across the pensions industry, no clear definition of it currently exists and which can therefore be incorporated into investment strategies,” Inman said. 

“With the diverse nature of DC scheme members only increasing, greater clarity is needed to aid targeting a sustainable level of retirement saving.”

According to Inman, this clarity will include setting specific targets for the aggregate default investment option.

He said this could help schemes see the bigger picture and understand whether their default investment is delivering a good outcome for members. 

“This will be increasingly important amid the uncertainty in today’s investment markets,” Inman added. 

Elsewhere, adoption of environmental, social and governance factors is still lagging in the DC scheme market.

Only 42 per cent of respondents assessed their investment options against ESG criteria. This relates to four in 10 schemes, which is an improvement from the one in 10 in 2020. 

Despite this “real progress”, Jo Sharples, chief investment officer for Aon’s DC solutions, has called for greater structure around this to help drive focus for greater ESG adoption. 

“We think this should be a real focus area for schemes to make better decisions,” she said.

“Unless ESG considerations are incorporated into default strategies — and currently just 15 per cent of schemes do this — they will not reach the majority of members. 

“Furthermore, as public opinion on responsible investing becomes more high profile and greater reporting is required from schemes, some may face difficult questions on management of ESG risk.”   

Recent rising inflation rates were also identified in the survey as a headwind, with trustees and schemes sponsors conscious of the asset allocation challenges this raises.

Inflation risk, coupled with the market’s current preoccupation with index outperformance, is another reason why Sharples is calling for schemes to review where members come into strategies and how these are formed.

“We suggest trustees and scheme sponsors go back to the basics in order to form a solid foundation of what they are trying to achieve for their members,” she said. 

“They need to consider their principles and beliefs, and the objectives against which they will assess their success. This should allow them to reaffirm conviction in the current strategy and governance approach or highlight areas for change.”