DC members should not be left to make investment decisions

GLOBAL - The growth of defined contribution pensions risks leaving investment decisions to less financially educated scheme members, warns Paul Verdin of Solvay Business School - while providers may be reluctant to provide direction for fear of legal liability.

Verdin, editor of Growth and Value Creation in Asset Management published today by SimCorp StrategyLab, also called for greater financial literacy.

Contract-based DC pension schemes often leave the fund investment decision to the scheme member rather than the asset manager, the book notes.

"The whole reason of existence for the sector should be that the professionals know better, and do a better and more efficient job than the final customer," said Verdin, Solvay's chair of strategy and organisation. "We believe we are going in a direction where the final decisions are delegated to the least educated."

In a chapter on behavioural finance, Alistair Byrne of Investit argues that DC scheme members will often become disengaged investors, accepting the default fund a scheme enrolls them in as they sufficient guidance.

However, in cases where a scheme member consults with an expert for more informed advice, many hesitate to give it as it could lead to the asset manager being liable in the case of an unsuccessful investment.

Verdin  proposes to increase financial literacy in the general population. He cited initiatives to teach finance in schools, as well as a programme underway in Brussels examining how the pension sector can educate its customers as two such positive steps.

Ten other chapters of the book examine a range of issues facing the asset management industry, such as the impact of current regulation and how IT tools can help enable growth.