The mission statement for any Defined Contribution pension scheme should be:
“To provide robust and proactive defaults and an environment where members can make informed decisions”
The purpose of a mission statement is to give a direction of travel to the governance of the pension scheme. It is an aspiration to be used to constantly guide trustees as they exercise their responsibilities.
The defaults include an investment strategy, the contribution structure, the decumulation process, the communications strategy and any other defaults used.
Robust defaults are defaults that are relevant and that have an intent.
Relevant defaults have to be based on member research: what is their age profile, their earnings profile, their appetite and tolerance of risk and aspirations. The more information that is gathered the more relevant a default can be. This data can be used to build models of the typical member and the defaults built around those models. The research and models needs to be as granular as practical to reduce the risk of significant numbers of members being too far from the average.
Defaults need to have an intent in order that scheme sponsors, trustees, governor and members can make informed decisions. The intent could be expressed as, for example, a replacement income ratio i.e. the percentage of pre retirement income needed in retirement (this can vary for different populations of members) or an fund size relative to earnings. An intent based objective will require a “best estimate” investment return.
Proactive defaults are needed as the world is constantly changing. All defaults should be reviewed and, if necessary, reset from time to time to reflect the changing economic and regulatory environment and changing social expectation (for example in relation to retirement age, incomes and form). A three year cycle of review is reasonable.
An environment where members can make informed decisions
Not all members will want to make decisions at every stage of their DC journey. Many will want to make use of the defaults.
Despite this we should strive to provide an environment where members can make informed decisions where there is a high standard of education and communication using all available tools.