UK/US- As defined benefit schemes in the UK increasingly give way to defined contribution schemes, trustees should look to the US and learn from the mistakes made there over the last twelve years, suggests Don Ezra, director of strategic advice at Frank Russell Company.
Speaking at a National Association for Pension Funds conference, Ezra highlighted the problems experienced in US defined contribution schemes.
The US boasts 10-15 years of experience of defined contribution schemes, and now DC and DB schemes have roughly an equal amount of assets.
Members originally established DC schemes to complement an underlying DB scheme, and so felt able to take greater risks with the former.
Coupled with a rapid growth in equity culture from 1990 onward, US DC schemes now have an average equity exposure of 75%, compared to DB schemes with around 65%. Continued underperformance of equities has therefore taken its toll on the US's DC schemes.
Ezra blames lack of education for the excess exposure in the US DC schemes, and warns UK pensions associations and members that they should be aware of the US’s experience.
"When setting up DC schemes in the US, it was considered vital to offer as much choice as possible to members so that they could select an asset allocation suited to their individual needs. What was not taken into consideration was that, there was simply too much choice. This is confusing and drives people to the default option.
“Lack of education caused schemes to invest a little in each asset type, or choose a fixed income and balanced fund, or a equity fund and balanced fund, so that portfolios were overweight in either equities or fixed income."