The higher charges for incorporating environmental, social and governance (ESG) and private market investments is a “real barrier” for defined contribution (DC) schemes, which are reluctant to reverse the fall in charges seen over the past decade, according to WTW.

The consultancy’s latest DC Pensions and Savings report found that average charges for DC schemes in the UK had fallen by 20 per cent, from 41 basis points in 2014 to 33 basis points in 2023.

It noted that this was primarily driven by the growth in DC assets, more frequent provider reviews and increased master trust provision in the DC market.

Following the savings achieved over the past decade, DC schemes are now reluctant to accept higher charges in return for greater focus on ESG investments or access to diversified asset classes, according to the report.

WTW’s research revealed that 26 per cent of schemes were willing to trade-off higher charges for increased access to illiquids and private markets.

Furthermore, only a quarter (25 per cent) were interested in enhancing their ESG strategy investments if it resulted in higher fees.

The remaining three-quarters were reluctant to do so or did not know if it was the right thing to do.

WTW stated that, despite recent government calls for pension schemes to invest in private markets and illiquid assets, innovation and scale would be required to overcome this reluctance to reverse the fall in lower fees.

“While it’s great news that DC schemes have successfully negotiated down fees over the past decade, in reality we know from our research that these modest gains do not alone provide a significant boost to average pot sizes for members,” said WTW retirement business director, Gemma Burrows.

“The opportunity to invest in more diverse asset classes, that were previously unavailable to DC savers, is something that should not be automatically dismissed on the basis of fees if, ultimately, they could provide better member outcomes.

“Scale and innovation are needed quickly in this area and careful selection of investment strategies, asset managers and funds will be a key part of the decision.”

The report also found that 34 per cent of single-employer trusts do not provide members with access to a drawdown arrangement, despite “most default investment strategies” now targeting drawdown rather than an annuity purchase at retirement.

“Trustees have been concerned about the risk of appointing third-party providers in the past due to this being deemed as advice, however doing nothing should be considered a greater risk and with the government’s recent consultation focusing on retirement products and services, the direction of travel is clear,” Burrows stated.

“Providing access to drawdown can also be used to allow members to stay within their existing pension plan if they wish. This means they can keep their existing investments and maintain trustee oversight, rather than having to transfer to a different provider, with the risk of higher fees and no protection from trustees.”

WTW’s report also touched on the issue of diversity, equity and inclusion (DEI), and revealed that nearly half (45 per cent) of schemes were planning to address their gender pension gaps in the near future.

However, only 8 per cent of DC schemes to date had taken measures to tackle retirement gaps between different demographic groups within the workforce.

“There are a range of factors that are within the power of DC schemes to do to help improve equality of outcomes in retirement,” said Burrows.

“The first step is actually finding out if there is a gender pensions gap or other disparities between groups within the scheme, and the extent of it. By collating and segmenting a scheme’s data it’s possible to understand the outcomes for each group, identify any gaps and see which areas to focus on.

“Once established then targeted action can be agreed. High quality financial education and guidance, can also be an effective action that DC schemes can take to help redress the imbalance.”

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