Aon survey raises concerns over workplace DC adequacy

At the same time, companies demonstrate a lack of awareness of the factors that can best influence good member outcomes in retirement, the research indicated.

In the consultancy’s latest Defined Contribution (DC) Pension Scheme Survey, Aon found that 42% of employers sought to align their pension provision with competitors, compared with 36% that said they sought to ensure employees had sufficient funds to retire at a “reasonable age”.

Steven Leigh, associate partner at Aon, said this marked a “backward step” since the company’s 2022 survey, which found that good retirement outcomes were the most important factor in pension design.

Almost half (47%) of respondents said they were considering a change to their DC pension structure. A quarter of those that did not already use a master trust said they would outsource their provision to a master trust in the next five years.

Member outcomes and adequacy

However, Aon flagged that, despite many looking to enact changes, there was a significant lack of understanding about adequacy and how to improve member outcomes.

Leigh emphasised the importance of making appropriate decisions to enhance DC savers' outcomes and noted that 42% of schemes are prioritising communication or engagement objectives. However, he expressed surprise that only 17% of respondents were focusing on increasing member contributions, despite the critical role contributions play in achieving adequate pension outcomes.

“Concerns about cost-of-living pressures may have moved the focus onto other priorities, but these should be weighed against the benefit – where possible – of early saving towards retirement,” Leigh said.

The survey found a median default contribution rate of 6% from companies and 4% from employees, but with a broad spread between the highest and lowest levels reported by respondents.

Leigh expressed disappointment that many employers (35%) did not have “a clear view of the expected outcomes for their members”. This level had remained stagnant since the 2022 survey, which he said showed “a distinct lack of progress in understanding this fundamental element of workplace pensions”.

Ben Roe, senior partner and head of DC consulting at Aon, added that the government’s Pension Review aimed to address retirement adequacy, highlighting the need for schemes to identify gaps and take focused action.

Default options and investment

The survey also found that, while 70% of DC schemes monitored component fund performance against benchmarks, only 29% assessed the aggregate impact on a member's investment in a default arrangement. This discrepancy suggests a potential misalignment between fund performance and overall member outcomes, Aon said.

Only 12% of respondents reported assessing performance against specific return targets, and just 9% used volatility targets. Two in five (41%) of schemes evaluate their investment options based on environmental, social, and governance criteria.

Joanna Sharples, chief investment officer for DC solutions at Aon, emphasised the importance of a good default investment option for DC savers, who typically do not make their own investment decisions. She advocated for monitoring default strategy performance against scheme-specific targets to ensure good outcomes for members.

Further reading

Five Steps to Better Workplace Pensions – Aon's 2024 DC Pension Scheme Survey

Savers less confident over retirement income, study shows (3 July 2024)

Trustees urge focus on pension adequacy after election (18 June 2024)