Mercer has prepared a watch-list of 10 challenges facing companies involved in the auto-enrolment process.

The consultant reckons that not only have auto-enrolment and defined contribution (DC) pension arrangements taken centre stage in 2012, they will continue to fill our heads, screens and magazines in 2013. However, with on-going 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. Backing a scheme solely on the basis of cheap fees will not deliver the returns pensioners expect."

Macro also says that employee communication is equally as important and companies should be up front about the amount which members are expected to contribute each year.

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.

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. They 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.

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

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.

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. Companies need to be clear of their goals before committing to a new scheme.

6. Revamp default pension fund options

Ensuring that the default fund is as good as it can be should be a fundamental objective of any governance body. The fund should also take into account the benefits of diversification.

7. Ensure investment options fit the member demographic

Scheme members have widely differing levels of financial knowledge, so different investment approaches should be made available to fit their needs. Those that don't choose the default fund find that access to a focused range of funds, categorised by risk rather than asset class, is preferable.

8. Prepare for the rise of income drawdown

Taking income from your pension fund while the fund remains invested and continues to benefit from any growth ('income drawdown'), is increasingly popular practice amongst members. Scheme managers should be prepared to offer alternative approaches for those who need it.

9. Guarantees could add value

Investment guarantees promise to pay a fixed percentage of any stock market gain and generally promise to return investor capital if the market nosedives. As guarantees gather interest in the market and are reduced in cost, it might be worth considering.

10. Tell them what you are going to say, tell them and tell them again

Clear communication is vital in a DC scheme. Companies should be clear and up front about the amount which members actually need to contribute to receive a meaningful pension.

First published 09.01.2013