European DC Survey 2007/2008

Summary of highlights

About the survey
In November 2007, Mercer invited organisations in 13 European countries to take part in a survey on defined contribution plan provision. The countries were Austria, Belgium, Denmark, France, Germany, Ireland, Italy, Luxemburg, Netherlands, Portugal, Spain, Switzerland and the United Kingdom (in an earlier stage). The objective of the survey is to help employers gain a better understanding of both the macro European market and local practices and, where necessary, refine their own plans and practices in order to address the key challenges facing them in securing value from their DC pension plans. We received responses from 235 organisations across 18 industry sectors, covering over 41,000 participants. The combined assets of the DC plans examined are approximately E520 million, with the average asset size of individual plans approximately E23 million. The number of employees in the organisations participating in our survey varies: 32 percent have less than 250 employees; 80 percent have less than 5,000 employees. In anticipation of the forthcoming full report, this summary presents highlights of the key survey findings. The data collected for the survey can be used to provide in-depth analysis – for instance, by industry sector or by size of plan (assets or active members). For more information, please contact your local Mercer consultant or refer to the “More details” section of this summary.

Highlights
The survey revealed a range of key facts about current market practice and identified a number of potential areas of concern for plan sponsors. 1. DC provision
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Although most of the DC plans reported are relatively new – they have been in existence for less than seven years – 25 percent were introduced before 1996. A quarter of employers responding to the survey offer (or plan to offer) a pension or trust-based vehicle in addition to their DC plan to help create additional wealth for employees. Another 16 percent offer (or plan to offer) an insurance-based vehicle for addition al wealth creation. And yet another 4 percent indicated that they offer (or plan to offer) a pan-European pension fund (PEPF). This is surprising, since very few PEPFs are in operation at this time. In a quarter of the companies responding, all DC plan costs are paid by participants via the annual management charge. In another quarter, most plan costs are covered by participants, but the company funds the costs for communications and investment advice. But 40 percent of companies responding pay the full cost of plan administration, while the participants fund only the investment costs via the annual management charge.

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Success factors rated by sponsors as a “top three” consideration for DC plans

Valued by employees Adequate benefits Cost predictability Attracting employees Supporting business and HR strategies Retaining employees High participation rates Low running costs Effort required by company/trustee Employee flexibility 0% 17% 10% 20% 34% 34% 29% 28% 26% 23% 47% 46%

53%

30%

40%

50%

60%

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2. Key success factors and challenges for plan sponsors
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When asked what respondents considered to be the key measures of DC plan success, over half (53 percent) said how their employees valued the plan was their chief concern. Other success measures are shown in the chart on the previous page.
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ing approach”, where the employer’s contribution depends on the employee’s contribution level, with the remaining 30 percent basing contributions on an employee’s age. According to our findings, the main consideration plan sponsors use to determine the company’s contribution is competitive positioning, either from the perspective of retention and recruitment or by looking at the retirement programme individually. Other factors that influence the level of company contribution are corporate compliance guidelines and the targeting of a particular level of company expenditure.

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Plan sponsors report that the top challenges facing them in the current year in the DC arena, by some margin, are ensuring employee understanding (59 percent) and effective communication (57 percent). These results are echoed by Mercer UK’s recent Work & Savings Survey findings of DC plan members, which indicates that lack of understanding is the biggest obstacle they face.

3. Design and benefit adequacy
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4. Communication
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Since social security systems (and therefore state pension levels) differ significantly from one European country to another, the following average contribution rates can only be used for general benchmarking purposes. - The average employer contribution rate is 5 percent of pensionable pay. - For members, the average contribution rate (excluding unmatched voluntary contributions) is 3.75 percent. Some 41 percent of companies responding use a “flatrate” contribution structure where the contribution is a set percentage of an employee’s pay. Of the remaining 59 percent, about half (29 percent) use a “match-

Although 39 percent of companies believe that communication around DC plans is about educating participants, another 37 percent believe that communication should be limited to provision of basic information about the plan. Finally, 22 percent of companies cited compliance with local regulation as a communication objective. Just under a quarter (24 percent) of plan sponsors see themselves as adopting a “paternalistic” approach to their DC plans, proactively trying to ensure that members retire with an adequate income. More than half (63 percent), however, see themselves as “facilitators”, preferring to provide “self-help” materials and tools for employees. Sponsors of contract-based plans are much more likely than their trust-based counter parts to see themselves as paternalistic.

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Usage of communication media by DC plan sponsors

Internet/intranetaccess to plan information Personalised/individual communication Newsletters, brochures Interactive computer modelling Group meetings/seminars One-to-one meetings Telephone Other 0% 25% 21% 17% 14% 7% 7% 10% 20% 35% 44%

61% 40% 45% 25% 46% 35% 28% 86% 30% 40% 50% 60%

21%

18% 16% 20%

50% 33% 48% 58%

Very important Important Not used

70%

80%

90%

100%

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While there’s a range of communication channels used by plan sponsors, a majority (82 percent) regard websites as a (very) important medium for member communication. Also, 84 percent consider personal ised communication as (very) important. Surprisingly, respondents also indicated a heavy reliance on printed, generic literature, such as newsletters and brochures. In many cases, communications are provided by the plan administrator, and the quality of those communications is considered to be a very important factor in the evaluation of the plan administrator (53 percent). Despite websites being generally recognised as the most important medium for communication, only little more than half of the companies responding (57 percent) are offering this feature to plan members.

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As for individual financial planning services or investment advice, 76 percent of participants do not provide such guidance, and the majority of that group does not anticipate doing so in the near future. In 40 percent of the cases, only one asset manager is available. However, interestingly, another 24 percent of the companies responding offer more than three asset managers, which indicates that open architecture products are increasingly available.

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6. Service delivery
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While 67 percent of trust-based plans have a service level agreement with their administration provider, this falls to only 36 percent for contract-based plans. This discrepancy is interesting, since 55 percent of the providers are offering a bundled solution that is, in general, seen as less open to service level agreements. Service of the administrator is considered to be an important determining factor in the selection of a provider (77 percent). A service level agreement is in place for about two-thirds of the plans (65 percent).

5. Investment
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On average, DC plans offer 15 investment funds, with little variation between trust-based and contractbased vehicles. Almost three-quarters (71 percent) offer a default option, which is used, on average, by 70 percent of plan members. The most common default is a ”balanced” fund, used by 35 percent of plans, followed by a “life-cycle” fund (23 percent), where investment risk is aligned to a participant’s age and gradually reduces over time.

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Incidence of service agreements in place with DC plan administrators

Pension/Trust-based vehicle

84%

11%

5%

Insurance-based vehicle

62%

38%

Yes Pan-European Pension Fund (Institution of Occupational Retirement Provision) 67% 33% No Not applicable

Other

64%

27%

9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

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7. Governance
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For a significant number of plans, there are no formal objectives, goals or policy guidelines. In fact, only 30 percent of organisations document their DC plans’ objectives and goals, and a written policy only exists for 27 percent. Another 25 percent indicate they have a policy, but it is “undocumented”.

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The majority of survey respondents monitor their plans’ investment performance more frequently than annually. About half perform other investment reviews – a qualitative review of investment managers and/or a review of the number of investment options offered to members – at least annually. While many sponsors are diligent in undertaking timely reviews of key areas of DC plan operation (especially in the regulatory arena), for a substantial minority some aspects are never reviewed – notably, appropriateness of investment choices (45 percent). On the other hand, benefit adequacy is either monitored annually (37 percent) or every two to five years (40 percent).

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Less than half of plan sponsors (43 percent) say they have established formal measures of success, but only 17 percent actually document those success measures. More than half of the companies surveyed compare their providers’ service against the service level agreement at least once a year. One-third of companies look at their agreements less frequently. Less than one-third of companies responding benchmark their providers’ level of service and fees against those offered by other providers on an annual basis. Most do this evaluation on a regular basis, but less frequently than annually.

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Existence of policy on the DC provision at corporate level
Investment guidelines Operational and administrative guidelines Plan objectives and goals Governance business plan Strategic direction Communication guidelines Success measures 0% 41% 39% 30% 28% 26% 25% 17% 10% 20% 26% 30% 40% 50% 60% 25% 22% 32% 57% 70% 80% 90% 100% 30% 15% 28% 44% 33% 40% 47% 52% 43% Documented policy Policy but not documented No policy

More details
To discuss any aspect of these survey highlights or to find out how Mercer can help you to design, manage and communicate your DC plan more effectively, please contact your local Mercer consultant or: Tim H. Burggraaf Tel: +31 (0)10 4060 874 tim.burggraaf@mercer.com www.mercer.com If you would like to receive a copy of the full report when it is available, please ask your local Mercer consultant or send an e-mail with “European DC Survey” in the subject line, including your name, position and organisation to: marketing.uk@mercer.com

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