Defined contribution (DC) schemes aim to give pension scheme members investment choice, but the question now is how much is too much.
Delegates at the 11th Fund Forum held in Monaco in July discussed the future of DC arrangements in Europe and whether members prefer little or large investment funds menus.
Richard Thaler, professor at the University of Chicago said that on average US$401(K) plans gives member the opportunity to select among 11 different funds, while the affiliates to the Swedish PPM system can choose among almost 500. “Consumer not always prefer having too much choice,” he said. Thaler, who through a research based on human behaviour has tried to demonstrate that investors are being forced to choose between too many funds. He said that distributors should offer the smallest selection of funds from which investors can choose. But, to be able to offer choices, plan sponsors have to first offer the adequate information.
“If you involve individuals in the funding of their own pension fund you have to give them access to information , and this is something we can learn from the way the US 401(k) models inform their members,” said David Butcher, managing director at Invesco Life in London. “But we have to take into account that the future of DC arrangements in Europe will not be a 401(k) model,’” he said. “In the mutual fund arena it might be true we are following the American model, but as far as DC is concerned, and contrary to what it’s been said by other delegates, there is no way will end up with 401(k) plans in Europe.” Butcher added that the differences among European countries will result in different DC models adapted to domestic circumstances, and “those differences will always remain.”
Also focusing on DC arrangements, Peter Thompson, chairman of the UK National Association of Pension Funds (NAPF) warned corporation to pay more attention to the risks of sponsoring DC arrangements in the future. He said that companies should take seriously the impact that a badly run DC plan could have on their reputation. Thompson mentioned the UK’s Turnbull report that is encouraging companies to considered all type of risks that their business can suffer. He said: “When it comes to pension these risks could include risks of failure, risks of litigation and risks to corporate reputation.”

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