EUROPE - Members of defined contribution pension schemes might in future be more confident about their investments if strategies were based more around "packaged passive funds", suggest panelists contributing to a DC study.
Clear Path Analysis has compiled the findings of several roundtable discussions with UK pension fund trustees as a report entitled Defined Contribution comes of age: understanding the opportunities and challenges of active management solutions.
However, several of the panelists believe the future of DC pension investments may in fact be based on passive investments or lower-risk assets such as bonds, in a bid to ensure members maintain their investment for the long-term.
Martin Mannion, director of pensions finance and risk at GSK, said he believes there are gaps in the market in terms of investment options for DC members.
"There are a couple of gaps. One is packaged passive funds which would have different risks so you could offer members high low, medium, red, blue or whatever so you could address their risk appetite in a very simple way," argued Mannion. "These are things that you have to be able to communicate in a letter that fills two sides [of paper]."
It's a strategy Philip Mendelsohn, managing consultant and trustee of Atkins Pensions Plan agrees with, as he added: "I think where Martin talks about having red, yellow, blue funds is exactly what we'll end up with. You have a default fund and then you have options that people can say are a bit more aggressive than default or a bit more conservative than default."
This particular roundtable discussion centred on the likely asset allocation for DC schemes in the future, but comment from panelists among other analysis suggests a greater focus on target date funds, perhaps focused around bond investments, could in fact be the likely direction of DC default funds and asset allocation.
James Churcher, pensions manager at Telegraph Media Group Limited, said his firm is now turning its attention to reviewing the default offering, in part because he believes many people do not necessarily reach their target retirement date and in most cases do not want to make active investment decision themselves.
"I am confident that however much we communicate and educate, the vast majority of DC members will still not want to have to make an investment choice. They're grateful that an expert makes the choices rather than them having to think it through for themselves," said Churcher.
"I think there is a perceived wisdom about lifestyling [investments]. We're looking at target date funds that are quite big in the US and it looks like Mark Fawcett is going to be recommending that as the default for NEST. Our plan in fact has quite conventional lifestyle investing and we have that as our default. We're looking at that and are thinking of reviewing it. The trouble with lifestyling and target date is people don't know in advance when they're going to retire and crystallise their benefits."
He continued: "Lots of people think they're going to retire at 65 and then get made redundant and take their benefits early. So we have to be careful with allowing people to choose their target date as no-one know it far in advance."
In order to tackle the need for diversity in investments, Churcher suggests in an authored article, as part of the report, that diversified growth funds, containing infrastructure, commodities, high-yield bond funds and long-short hedge funds might be a route to consider.
The early signs are that even in the economic downturn the best diversified growth funds have done really well," said Churcher.
At the same time, however, he warns, if trustees of DC plans want to deliver lower-risk returns through diversified growth they would also need to win around support for the prospect of higher fees.
"Trustees need to take care though: inevitably the investment management fees for a diversified growth fund will be higher, so schemes could be paying a lot more for lower long-term growth," said Churcher.
Whatever the strategy, Kevin O'Boyle, pensions director for the BT Pensions Plan, feels trustees should be careful not to become too paternalistic about deciding a DC plan's default investment strategies as it could lead to legal action.
"It is actually down to the individual to decide where they're going to put their money and monitor their own investments as well. There's generally no responsibility on the trustees to go further than that. It could actually be very dangerous for DC sub-committees to get more involved and make more decisions in that space," he claimed.
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