Mercer states that with ongoing market volatility and a continuing swell of regulatory change on the horizon, DC scheme sponsors, trustees and governance committees need to be aware of the opportunities and challenges that lie ahead.
Paul Macro, a partner in Mercer's DC business said: "Implementing auto-enrolment will be a focus for many organisations in 2013 and meeting deadlines will be a challenge for many because they are simply not ready.
"Sponsors and trustees will have to grapple with the practicalities of selecting and implementing appropriate DC providers. Employers should offer value for money to their pension scheme members, but backing a scheme solely on the basis of cheap fees will not deliver the returns pensioners expect.
Macro added: "Equally important is employee communication. Employers should be up front about the amount which members are expected to contribute each year. They should provide a variety of alternative investment fund structures and should be transparent on scheme charges. All of this will take time and effort but it is needed if employee expectations about the amount they are able to retire on are not to be disappointed in the long-term."
Mercer's new year watch-list looks at ten potential pitfalls, or opportunities, for the year ahead:
1. Prioritise auto-enrolment
Preparing for auto-enrolment takes time and can be a complex process to implement. It is critical to success that employers begin the planning process as early as possible. The consequences of not doing so could be large fines and/or reputational damage.
2. Value for money, not bargain basement
Employers should weigh-up cost and overall service quality with great care when considering a new pension scheme or changes to an existing one. Employers may opt for one with minimal administration or investment charges, but to ensure employee buy-in the scheme must provide the level of service and investment returns expected by the membership. This may not be possible with schemes operating at bargain basement rates.
3. Adequate pension contributions are essential
Employers need to carefully consider scheme contribution rates to ensure that contribution levels are both sustainable in the long-term and are likely to provide a suitable level of retirement benefit for employees.
4. Smart governance is the key to success
The Pensions Regulator's focus on DC governance is only going to increase, so a successful scheme needs an appropriate governance structure in place. Ideally, trustees should have DC expertise and ensure that sufficient time is spent to deal with the breadth of issues that are likely to arise following auto-enrolment, such as a changed membership profile and increased communication requirements.
5. Out with the old and in with the new?
Existing schemes may see increases in charges following an influx of auto-enrolled employees. Many may need changes to contribution structures to meet auto-enrolment requirements or company budgets, or may not provide sufficient investment flexibility. Employers need to be clear of their goals before committing to a new scheme or remaining with existing ones.