Laura MacPhee finds out how a 20-year-old DC scheme has moved with the times

Caterpillar had a defined contribution scheme before it was cool. It has just celebrated its 20th birthday, and is “very mature as far as schemes go”, says its pensions manager Jane Wilson.

Caterpillar

In the early 1990s the scheme was viewed as a positive choice, rather than a poor relation, because it was a “portable benefit”, which reflected changing working patterns – a job for life had become a rarity, and younger employees in particular would spend two or three years with a company before moving on.

Wilson and her colleagues are determined to make sure that, two decades later, it is still a valuable benefit for employees of the industrial equipment manufacturer. Because the Caterpillar DC scheme was originally set up to be run in tandem with its defined benefit offering, “it was set up, governance-wise, to be run the same way”, says Wilson.

A small pension that’s being taxed every month is not necessarily the most useful fund for them when suddenly they lose their partner’s income

This extended to replicating DB benefits in a DC context. DC members can take advantage of life assurance and incapacity benefit, just like their DB peers. These features were reviewed in April 2012 because the scheme originally offered four times salary on the death of a member, plus a spouse pension.

This was problematic because the spouse pension was insured, and the cost of insurance was becoming unsustainable. It was also unrealistic to suppose that someone who was widowed in their 40s would necessarily remain alone, so “a small pension that’s being taxed every month is not necessarily the most useful fund for them when suddenly they lose their partner’s income”.

It has now been replaced by a lump sum of nine times salary, which Wilson is proud to say is above the average of four to eight times.

EXPANDING CHOICES

Although the company has a paternalistic attitude towards its employees, another change that came in 2012 was the expansion of the available investment choices. The scheme reviewed its core fund range improving the choice from three to four, adding a diversified growth fund to the already existing long-term growth fund, defensive fund and cash fund.

All of the investments are passive in order to keep it straightforward and simple, both for the member, and also from an administration point of view

Now “there are also a greater number of funds available to the member who might want to freestyle”, says Steven Blackie, the partner at Mercer who advises the scheme. Members can invest separately in UK, European, North American, Japanese, Asian or emerging market equities, and various fixed income funds.

“All of the investments are passive in order to keep it straightforward and simple, both for the member, and also from an administration point of view,” says Blackie. This also helped the scheme “to make sure the members’ costs are as low as possible”, he adds.

“This has helped to address questions from a core group of members interested in taking a more active role in managing their fund about changes to their investment options,” says Wilson. “Feedback from this group about the changes made has been generally favourable.”

THE VALUE OF COMMUNICATION

Communication is also not a matter that the scheme takes lightly, though. This was particularly important at the time of the relaunch, when the scheme removed the age link to contributions – older members traditionally received higher employer contributions, but this was reformed in 2012.

Paresh Desai, a member-nominated trustee, says: “There were a lot of current members who were going to have things changed – and change can be quite challenging. That did make us focus more on our communication strategy.” At the moment, the scheme sends out information packs and emails to its members, who have access to websites where they can access up-to-date information about their funds.

The team is looking at new ways to engage younger members in particular, for example by putting up QR codes on notice boards

The website allows members to submit switch requests and it provides a planner so they can consider different projections of their income in retirement. Desai says the communication strategy is “still a work in progress”, and the team is looking at new ways to engage younger members in particular, for example by putting up QR codes on notice boards so they can access the latest news using their smart phones.

Whatever they decide, Wilson and the trustee board seem up to the task – Blackie says: “If you put energy and enthusiasm into something, that’s going to come out in some way.” In this case that means “good investments, but also having a very good and clear communication policy with the members”, he adds.