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IPE special report May 2018

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Credit crisis puts DC back in the spotlight

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  • Credit crisis puts DC back in the spotlight

UK - Employer-sponsored defined contribution (DC) pension schemes may have to step up their game as the financial crisis has thrust governance issues into the spotlight, according to research published by Watson Wyatt.

Governance, investment, communications and at-retirement options are issues currently facing DC pension schemes but, according to Watson Wyatt's research paper, entiled DC - reality bites, employers will strive to drive up DC quality as more defined benefit (DB) plans close to future accrual as a result of the economic crisis.

"The current economic crisis has been a wake-up call for most employer-sponsored DC schemes," suggested Gary Smith, a senior consultant at Watson Wyatt.

"Members of DC schemes glancing over their annual benefits statements this year will be disheartened by the dramatic falls in their fund values. That will do little for employees' confidence in DC pensions and in pensions generally. But during the coming months, there will be a significant debate around developing stronger and more focused solutions," he added.

The report said the economic crisis has brought into focus the compulsory employer pensions due to be introduced in the UK in 2012 and recommended DC pension providers focus on running an efficient, profitable business to offer stronger, better quality products to beneficiaries.

"Time and energy has to be spent nurturing and developing DC to make it better, stronger and more fit for purpose," said Smith.

He claimed the credit crisis has increased people's awareness and understanding of DC schemes, as some private sector DB plans will inevitably close to future accrual as a result of the crisis and push more people into DC plans.

"Communication is one of the tools providers and employers need to embrace to improve member engagement. Messages need to re-enforce the point that DC requires individuals to grow a fund and to do that investments are for the long term," said Smith.

Watson Wyatt's research predicted the recent decline in popularity and trust in companies' conditions will ease as alternative investments like property prove to be stable and reliable assets.

"During the coming months, there will be significant debate around developing stronger and more focused investment solutions," said Smith.

"Traditional approaches have been tested and, in some cases, found wanting. The market will learn and move forward. The vital need for strong and robust governance of DC plans has been starkly brought into perspective. No longer will it be acceptable for governing bodies to put off consideration of the DC issues," he added.

The 32-page report includes articles addressing the challenges for DC investment, the impact of the at-retirement market, the changing provider landscape and future design of DC plans.

If you have any comments you would like to add to this or any other story, contact Poppy Sketchley on + 44 (0)20 7261 4629 or email poppy.sketchley@ipe.com

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