LONDON, 14 September 2006 – Almost one in three (30%) trust based Defined Contribution (DC) pension schemes are now offering members in excess of 20 investment funds to choose from, in an attempt to address a broad range of possible member requirements, according to Aon Consulting’s latest DC pension scheme research. 

By emulating a practice which is widespread amongst contract based schemes, Aon Consulting argues that trustees run the risk of failing to meet their legal responsibilities and of overwhelming scheme members with a deluge of choice.

Under The Occupational Pension Schemes (Investment) Regulations 2005, trustees are required to set out in their written Statement of Investment Principles “the ways in which risks are to be measured and managed”.  Trustees are also required to ensure that their scheme’s assets are invested, “in the best interests of members”. Aon believes that simply offering more funds for members to choose from without providing sufficient education will not produce an outcome in members’ best interests. This is because an overwhelming range of options is likely to drive more members to simply end up in the default ‘one size fits all’ investment fund.  Previous research by Aon Consulting showed that more than 75% of members opted for default funds where they are made available

Conversely nearly one-third of schemes (32%) surveyed offered five or fewer investment options, potentially leading to a similar rise in the number of members opting for the default fund, because of the limited choice.

This only has a direct effect for trust based DC pension schemes as, contract based arrangements have no trustees and, therefore, no formal requirement to monitor the funds being offered to members.

Commenting on the regulatory requirements governing a trustee’s role, Paul Macro, Head of Aon’s Defined Contribution Propositions, said:

“Trustees have a difficult balancing act.  Many wish to emulate the wide scope of investment choice being offered to members under contract based DC schemes.  But in doing so, it would be easy for them to negate their responsibility to ensure that the scheme’s assets are invested in line with the members’ best interests.

“Overall, it is difficult for trustees to be able to fulfill their investment requirements by offering too few (less than five), or too many (more than 20) investment fund choices for members. Too few choices and members won’t have the choice of something suitable, too many and most won’t know where to start in selecting something suitable.

"However, it is not impossible.  What is important is the availability of information and communication, both of which can play a crucial role in helping members to pick the investments that are right for their circumstances. 

“Wide investment choice must be accompanied by a comprehensive, easy-to-understand communication programme to members – which outlines what levels of risk members should be taking, what the options are, how they differ from the other choices on offer and whether they are low or high risk investments in the context of members’ investment requirements – only then can members make informed decisions, and trustees take comfort in the fact that they’ve worked to the best of their ability to meet their legal obligations.”   

A further breakdown of Aon Consulting’s DC survey findings is attached below:

Notes to editor:

1. Aon’s latest DC research was carried out during the first half of 2006.  The survey was conducted amongst 170 DC pension schemes in total.  Of this, 25%  (43) were trust based occupational schemes, and 75% (127) were contract based occupational schemes, 53% of contract-based schemes that participated in Aon Consulting’s survey offer between 20 and 50 investment fund choices to members, with a further 27% offering more than 50 options.
2. Aon Consulting’s earlier DC research was carried out in January 2005.  A total of seventy five in-depth interviews were carried out amongst senior finance and HR function executives of companies which provide DC pension benefits to their staff.   

About Aon

About Aon Consulting

Aon Consulting is a leading human capital consultancy, helping organisations of every size to attract and keep the employees they need. We advise on all aspects of employment, including health-related insurance and risk; employee compensation and pensions; human resource strategy planning; job design and change management; and staff assessment and legal issues. Aon Consulting is a division of Aon, one of the UK’s largest insurance brokers and providers of risk management services and a major force in reinsurance and the UK human capital consulting market.  Aon Consulting Limited is authorised and regulated by the Financial Services Authority.

Aon Corporation is a leading provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting, and specialty insurance underwriting. There are 46,000 employees working in Aon's 500 offices in more than 120 countries. Backed by broad resources, industry knowledge and technical expertise, Aon professionals help a wide range of clients develop effective risk management and workforce productivity solutions.

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