GLOBAL - State Street has claimed defined contribution (DC) regulations and fiduciary oversight need to develop in a global rather than national context as the shift from defined benefit (DB) to DC continues.
At a presentation on the latest Vision report on pensions - entitled Strengthening the DC Model for the Future and first published last month - Wade McDonald, senior vice president at State Street Global Services, said the shift to DC had been accelerated by the financial crisis.
And while many DB plan managers had reduced equity exposure at the onset of the crisis, McDonald said many DC participants in 401(k) schemes in the US and other countries failed to move as quickly.
"The key lesson of the crisis is that many participants do not understand risk. Clearly there is a lot of work to be done in DC on asset allocation," said McDonald.
He told attendees that in addition to a need for improved incentives for member participation and better education on risk management, a key challenge for DC schemes is the introduction of stronger rules around disclosure and transparency in particular.
McDonald noted there is scope to strengthen regulatory frameworks in many countries to meet exposed vulnerabilities in DC schemes. But he argued the industry needs to make sure there are "common and consistent developments in regulations in the DC world. We need to see regulations and fiduciary oversight standards evolving in a global context".
One example of possible convergence is a renewed focus on fiduciary responsibilities, such as the qualifications of board members and the monitoring and responsibilities of fiduciary and investment committees, particularly on issues such as alternative investment strategies. (See earlier IPE article: DC plans should review fiduciary responsibilities - State Street)
He added: "It is all about the balance of technology, education and responsibilities of the plan sponsor and regulators, to ensure the environment improves for the risk taken by the employees."
McDonald suggested, for example, that the design of the scheme and the underlying products "have to be articulated in such a way to make it compelling for people to save for the long-term". Policymakers therefore need to encourage innovation in DC arrangements.
Kanesh Lakhani, senior managing director at State Street Global Advisors (SSgA), argued "some of the technologies of DB investing could be heading to DC schemes" in the future. He suggested this could include some kind of liability-driven investing (LDI) strategy, similar to developments in the German market where the law requires a guarantee on certain pension investments.
He noted while it was "early days" and no DC scheme in the UK appears to have adopted DB strategies, another potential option might be that "as an individual approaches retirement, they could use asset matching, or inflation hedging".
Lakhani said State Street Global Advisor's DC assets under management worldwide are valued at around $247bn (€184.3bn), but said this is expected to grow even further.
To aid this growth, he confirmed State Street is planning to add to the DC team and at some point "bring in a specialist to exploit opportunities in this area".
He also said the firm is considering the possible introduction of target date funds to the UK market - currently offered to US schemes - but said it "depends on the timing as the demand is there".
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