Investment decisions should not be deferred to members, as many “lack competence” or are comfortable leaving investment decisions to others, according to panellists at the IPE annual conference in Vienna this week.
Richard Gröttheim, former chief executive officer of AP7, Sweden’s state alternative to private investment funds, said that members should not be responsible for making investment decisions.
He pointed out that historically, in Sweden, defined contribution (DC) members could choose from 800 different protocols and AP7 acted as the default fund.
However, people “didn’t have the competence, the interest or the time” to make the investment selection and many invested in funds in alphabetic order; some others based it on historic performance.
“in 2000 we had a lot of IT-related stuff out there and everybody thought this was the way forward, so let’s invest in them, and that was rubbish [which] led to bad decisions with bad investment returns,” he explained.
As a result, default fund selection increased from 33% to 50% today as “individuals and young people feel comfortable in not making a decision”.
Gröttheim – joint winner of this year’s IPE Outstanding Industry Contribution award – said that AP7’s performance is double that of the private platform “which shows that having a default fund that performs well, takes care of sustainability and other things in a way that people like, is the best way”.
Because of this, Gröttheim believes that members are “not competent enough” to make pension investment decisions.
“We can’t expect people that don’t have any financial education or background in this to form any decisions”
Richard Gröttheim, former CEO of AP7, told the audience at the IPE annual conference in Vienna
“We can’t expect people that don’t have any financial education or background in this to form any decisions,” he said, adding that AP7 asks members whether they want to make an active choice of funds themselves or whether they want to rely on the default fund.
He said that while some expressed that they were “competent enough”, they still wanted someone else to take care of their money.
Gröttheim said AP7 surveyed members every five years and the results each time showed that “most people, when it comes to pensions, want to rely on someone else to do it”.
While Gröttheim said that leaving the decision to savers is not the way to go, “you do need to communicate well what you’re doing, why you do it, why you have high risk”.
He said: “We have a lifecycle product and when you’re young you have very high risk and then you scale it down. You have to communicate that. And when it comes to sustainability, it’s important to communicate why it matters. But having people too much involved in the process, I don’t think that is right.”
Laura Merlini, managing director for EMEA at the Chartered Alternative Investment Analyst Association (CAIAA), agreed with Grottheim and added that deferring investment decisions to members is “a breach of fiduciary duty and the duty of care”.
CAIAA published a paper called ‘A Renewed Professionalism’ which Merlini said defines the traits that characterise investment professionals of the future in six guiding principles.
One of the six principles refers to the importance of cultivating a transparent and client-centred ethos.
She explained: “It means that as an investment professional, I need to incorporate the views of my members, I need to know their purposes, I need to understand their risk appetite and I need to create an investment strategy that is aligned with these views.”
Merlini added that transparency is also important. “We should be able to communicate why we’ve taken certain investment decisions and how these investment decisions help members reach their goals,” she said.
Don van der Steeg, senior manager of workforce strategy at PWC and board member and chair of KPS, said that in the Netherlands there is a lot of legislation and guidance on how, why and when to consult members on their risk appetite and funds are required to undertake these exercises every five years.
He said: “It’s quite a difficult thing because, while there is guidance there is no set way in which you have to do that. Methodologically speaking, there are so many ways you can frame questions.”
He added that, in the past, questions would be around ‘how much risk would you like to take’, which did not produce the desired answer.
“Research shows that people aren’t quite able to articulate the amount of risk they would like to have the appetite for”
Don van der Steeg, senior manager workforce strategy at PWC
“Research shows that people aren’t quite able to articulate the amount of risk they would like to have the appetite for, or preferences that they have. If you ask the right questions in more highly educated populations or pension funds, on average, 94% of people are quite consistent in how they answer questions about the risk reference,” he continued.
“That goes down to about 80% of the lower educated pension fund members. That’s still a significantly high percentage of people that are capable when asked the right questions,” van der Steeg continued.
However, he said the problem is that the questions are about risk preferences and not risk capacity.
“On risk preferences, you can ask the questions in questionnaire form every five years or more often if you’re so inclined, but risk capacity is something we are quite hesitant to take into account because it needs to take into account the entire personal financial situation of members, which is a hell of a job,” he said.
He added that the Netherlands is now experimenting with integrated financial planning tools which help members in a “whole different way” but the data gathered from that might be influenced towards a specific asset allocation, so it is possible to dive into more detail on why the risk appetite of the total population is as it is.
However, Robin Harries, lead consultant at Quietroom, disagreed with the panellists, saying the money belongs to savers. “It’s their savings, it’s their money”.
He said that, subject to appropriate guidance, the way investments are made should reflect members’ wishes, pointing out that there are “massive advantages” to engaging members in how money is invested.
“If you ask them what they think and you do your best to reflect their views, you’re more likely to build trust with your members, they will want to engage with the scheme, they will value it and we hope they contribute more to the scheme which means they will have a better retirement and we will have more money to manage,” Harries explained.
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