Pension schemes should encourage members of defined contribution schemes to personalise their investment strategies by helping them set individual journey plans, a Watson Wyatt paper says.
The consultant's publication - entitled Journey Planning: a more engaging approach said establishing retirement targets, developing long-term saving journey plans and monitoring progress would make members better placed to take appropriate actions to ensure they have adequate retirement savings.
Watson Wyatt senior consultant Gary Smith said: "In the current environment, where there is so much doom and gloom around pensions, it would be very useful for DC members to be able to put into context where they are on the savings journey relative to where they ought to be.
"In many cases this would put the benefits of saving for retirement into better perspective and help allay fears about never being able to retire."
He added: "While DC plans need to recognise that they are unlikely to ever get the majority of their members proactively making savings and investment decisions for themselves, this more engaging approach can, we believe, help encourage a greater number of those willing to engage within DC plans."
Watson Wyatt explained there were broadly three categories of members, based on their willingness to be engaged:
- The true defaulters: members who do not have any financial expertise and have no interest in their pension savings, so are likely to remain entirely disengaged
- The guided-selectors: members who have the potential to be more engaged in their pension savings and have some financial knowledge to support limited decision making. With improved communication and framing of investment options, these members are more likely to achieve an investment structure more suited to their individual needs than a pure default
- The self-selectors: members who are motivated and financially literate and are able and willing to take investment decisions.
Smith explained: "DC members are more likely to achieve their retirement objectives if they have more clearly articulated goals and the level of interest, ability and tools to support their decision making along the journey."
The firm suggested that by monitoring progress against a target, members would be better placed to understand and manage their exposure to investment risk as necessary - essentially adding a simple, dynamic overlay to an otherwise automated lifecycle strategy.
However, it warned that - while this approach would be useful for self-selectors and would be of particular value in encouraging guided-selectors - true-defaulters tended to lack the willingness to engage sufficiently.
It said fiduciaries would need to created default journey plans for this category of member.
Smith said: "While the annual benefit statement provides basic information, it does not give members any idea of their progress and is generally not helpful in overcoming the ‘set and forget' mentality, resulting in decisions made on joining the scheme rarely being changed.
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