Defined contribution (DC) pension schemes in the UK are ill-equipped to meet member objectives, according to pensions specialist Aon Hewitt.

A survey carried out by the company showed “a stark disconnect” between schemes’ ambition to achieve better outcomes for their members and what schemes can actually deliver.

Sophia Singleton, a partner at Aon, said: “If expectations are out of step with what is realistically possible, schemes need to address this urgently to avoid future problems.”

However, according to Debbie Falvey, DC proposition leader, “the industry is unlikely to find a solution on its own.”

In the context of the UK’s pensions freedom agenda, with increased choice for members in terms of how they obtain benefits, industry players are compelled to come up with solutions for members.

But Falvey highlighted the importance for the UK government to step in with specific incentives.

This would be needed to facilitate the creation of solutions on issues such as increasing longevity and encouraging members to invest for late in the decumulation phase.

The Aon survey included 297 UK DC schemes with nearly 1.2m members and £33bn (€47bn) in assets, and found that many schemes were “without the knowledge and management reporting needed to facilitate an improvement in outcomes” for their members.

According to the survey, although 90% of respondents receive information on investment performance, only 16% receive regular management information on outcomes.

Aon’s survey shows that achieving better member outcomes was among the top three objectives for 57% of the schemes interviewed.

The other priorities were achieving specific communication goals (46%) and evidence of increased member engagement (45%).

However, 68% of the schemes in the survey had no knowledge of the expected replacement ratio for their members.

Another measure of the disconnect between members’ expectations and schemes’ capabilities was the relatively low percentage of trust-based schemes (43%) that either had a preferred drawdown solution in place or were developing one.

Drawdown solutions have been a focus for the UK pension industry since the government removed the requirement to buy an annuity at retirement in its March 2014 Budget, with the rules coming into effect in April this year.

The 2014 changes introduced the possibility to access pension pots from the age of 55, with 25% accessible as a tax-free lump, and the rest at the marginal rate of taxation.

However, Aon believes the annuity market is “not dead”, and that annuities may be marketed later in pensioners’ life, to see them through the latter stages of their lives.  

Further changes to UK pension regulation could be included in this year’s Autumn statement, due to be released today.

Earlier this year, the government began an industry consultation on the DC tax framework, proposing to move from the current EET framework (tax-free contributions and returns, taxed benefits) to a TEE one, removing tax relief on contributions and introducing tax incentives on returns and benefits.

Aon’s Singleton pointed out that, although the government would weigh the opportunity of receiving a large tax windfall from such a change, such a move would “completely rewrite the pension book”.

Aon has put forward its proposal for a new DC tax framework, in response to the UK government’s Green Paper.

The company’s approach, dubbed “IET (Incentive-Exempt-Taxed) plus”, consists of contributions paid from net income, a Treasury bonus of £1 for each £2 of contributions (with a maximum £10,000 per annum) and marginal tax paid on employer contribution.

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