Defined contribution (DC) pension fiduciaries must take more concrete steps towards providing members with an adequate income in retirement in line with the UK Pensions Regulator’s vision set out in January 2011.

Nico Aspinall, head of DC consulting at Towers Watson, said: “The Regulator’s vision presents many challenges, not least of all defining an ‘adequate income’ as the objective or mission of a DC pension scheme and setting out a risk management framework to achieve it. But fiduciaries cannot move between a defined benefit (DB) and a DC frame of reference simply by altering their mission statement and using the same tools: DC is intrinsically different.” In a paper, entitled DC mission: vision and action, Towers Watson acknowledges that while DC schemes are all at different stages, clarifying their DC mission through a risk-based framework should be a priority given it can focus the scheme on providing members with an adequate income in retirement; the main pillar of the Regulator’s vision. Nico Aspinall said: “By putting members’ expectations at the centre of defining an adequate pension, fiduciaries can design a framework that manages the material alterations members can make. It will help them focus on monitoring outcomes and extend risk management to incorporate factors, besides investment performance, that affect the delivery of pensions from their scheme. This also provides a basis on which fiduciaries can improve member engagement, with pension outcomes being central.”

In the paper, Towers Watson encourages DC fiduciaries take a number of actions to help clarify a scheme’s DC mission and shift the focus towards member outcomes. They include: An analysis of the projected retirement income of members which could be of the figures in benefit statements or projections of a representative sample of members; An understanding of the risks affecting these projections and by how much they might reasonably be affected ; A decision on the extent to which fiduciaries should try to mitigate these risks, and the extent to which they should be communicated to members. Nico Aspinall said: “We believe that schemes would benefit significantly from considering which risks affect the future benefits their members might receive and what they might do to let their members take control of the expectations and the risk during the journey towards retirement date. Incorporating these scheme-specific factors into the DC mission would support better management of member outcomes and would be more engaging for members themselves.”