Understanding DC members’ needs ‘essential’

Understanding your membership is absolutely critical to managing a defined contribution (DC) scheme, said Michael Jones, a partner at Eversheds Sutherland, speaking on a panel on the future of DC retirement at the PLSA investment conference in Edinburgh.

While accumulation is an important component of a DC scheme, trustees must be aware of the potential for risk around their chosen decumulation strategy. So, what does the default strategy look like, asked Jones, and does that default strategy target something that the majority of your members within the default want and need at retirement?

“It’s no good targeting drawdown if you’ve got members with small, fragmented pots that need and want to take cash,” said Jones.

“If trustees are targeting a drawdown solution… and only 40% access that facility, trustees know they will have to deal with the 60% that aren’t. That means they will have to derisk earlier to mitigate those members potentially cashing in all of their savings.”

Jones added that it was also important how trustees, as non-authorised persons, can access some of the FCA’s proposals on guidance, because they cannot offer regulated advice. There are issues from the fiduciary perspective, with recommending other advisers, said Jones, but could they provide a more tailored form of support?

“Tailored guidance is absolutely critical to getting members the retirement solution that they want,” said Jones, “so, to what extent could trustees access targeted support?”

His final point was that bulk transfer without consent is possible, but requires a shift in mindset.

“The reason why – currently – we need members to consent is because we want them to consent to designate their funds to drawdown,” said Jones.

“But a facilitated route or bulk  transfer might get trustees and members to the place they want to be and they can then bring in some of these default retirement options the Department for Work and Pensions intends to see offered.

“There’s quite a lot that we, as an industry can do now, before we have to legislation telling us to do it.”

Speaking about investment options, Jesal Mistry, head of DC investment proposition and governance at Legal & General Investment Management, said private assets with regular inflation-linked income are well suited to someone drawing down, but the risk must be managed.

“We have the tools across the asset allocation and across the annuity products,” Mistry said. “We need to link it to the investment and the member engagement journey. Being able to use those tools at the right time will be most critical.”