GLOBAL – Watson Wyatt has awarded the current investment sophistication of defined contribution schemes very low grades.

Speaking at a roundtable event in London, the global consultant said it would give schemes between two and three out of 10.

“And there is no reason why they shouldn't be an eight or nine out of 10, and challenge the investment sophistication of DB schemes," said global head of investment consulting Roger Urwin.

Problems currently facing the DC industry include limited financial literacy, low time commitment and a lack of engagement.

The market also tends to be provider-led, product efficiency is poor and DB innovations are ignored, said Urwin. Corporate sponsors also have, in many cases, adopted an ‘over-to-you’ approach to their DC schemes.

Watson Wyatt has unveiled a vision for a DC plan of the future, which could become a reality in five to 10 years time. It aims to be more dynamic, pro-active, multi-dimensional and simple.

According to Watson Wyatt senior investment consultant Crispin Lace: “We want a building block approach, and keeping it simple is ideal. DC can be a one-way street – it’s easy to add things but difficult to take things away.”

Watson Wyatt’s DC model includes lifecycle DC planning (flexible retirement, auto-strategy rules, increased engagement in planning); efficient DC investment design (only two investment funds, diversity strategies and value for money); and post-retirement investment (mutual master trust, post-retirement lifecycle and mortality pooling).

As it is, Watson Wyatt is already encouraging its DC clients to diversify their investment portfolios.

Its DC plan of the future includes investments in fund of hedge funds, private equity, commodity futures, infrastructure, high yield debt and emerging market debt. There is also a significant reduction in equity allocation.

“We are engaging with the industry,” said Urwin. “We really need something like this. We don’t expect everyone to do this – there are different ways to build better strategies with more diversity in them.”

Rather, it should be thought of as “step by step towards something of that nature”.

According to Urwin, “The impact of the DC market going forward will be huge”.

While the global average currently stands at 30% DC schemes: 70% DB schemes, “figures are evolving not changing dramatically”, he said. This is because while lots of new money is moving into DC schemes, lots of old money is still in DB funds.