Focus Group: Contribution to the future
Two-thirds of the funds polled for this month’s Focus Group said defined contribution (DC) represents the future for pension provision. “Only DC is a true picture of pension savings,” said an Austrian fund. A UK fund added: “Defined benefit (DB) is a 20th century anachronism, when life expectancy was much shorter. The challenge is to create well-governed, efficient DC schemes, sharing or hedging risks that the member cannot afford to take.”
However, a Dutch fund disagreed: “DB delivers better results in the long run for less money.” Another Dutch fund also had doubts: “A lot needs to change before DC is an acceptable solution for pension needs.”
Fewer than 15% of respondents said DC funds are generally worse governed than DB. “Where employers have both DB and DC, my experience is that DC is typically the poor relation of the larger DB scheme,” said a UK fund.
Four in 10 respondents said individuals generally get a bad deal from for-profit DC pensions provided by banks or insurers. A UK fund said: “[They are] product-focused not outcome-focused, opaque, the charges are too high, poor customer service. What’s to like?” A Turkish fund said it is not so straightforward: “[It] depends on the fund, competition in the market and if transfers between funds are possible”.
Half of those polled said occupational DC pension schemes should prioritise simple/low-cost provision over complex/costly investment strategies. “Costly investment often does not bring the return to the system, but to the organisation,” stated an Austrian fund. A Belgian fund said: “It should be simple in the sense ‘easy to understand by the employee’, but sophisticated enough to optimise risk, return, security and cost.”
Two-thirds of respondents said a DC scheme should have two to five funds or options, while a Portuguese fund highlighted the need for “choice in terms of risk and fees”. A Dutch fund agreed this is the correct number as it would “limit complexity, while offering different ambitions for different age groups and meet the individual needs of participants”. One-in-five funds said there should be over five fund options, and only 7% said there should be one default fund option. A further 7% said it made no difference.
Just over half of respondents agreed that designing appropriate investment strategies, such as lifecycle, can reduce investment risk for DC members. The same number said designing risk-sharing mechanisms for specific risks, such as longevity and inflation, is the answer.
Some 36% suggested focusing on post-retirement solutions, 31% favoured optimising governance to maximise efficiency of investment strategies, and 29% suggested finding ways to share a degree of risk with sponsors.
Half of respondents said a DC fund should be free to determine its own communication strategy. A UK fund commented: “It needs to be able to reflect the culture of its business, the profile of its membership/employees and its rationale for offering a retirement savings vehicle.” A Spanish fund had the opposite view, saying it could cause “a distortion of the information or the information policy”.
A quarter of respondents welcomed the EU’s plan to create Europe-wide personal pensions, while a further quarter opposed the plan. “The differences among the systems are too big to be put into one system,” said an Austrian fund.
There are varying views on what single thing could be done better in the provision of DC pensions. “[They] need to educate members on the projected outcome they can expect from their DC scheme,” said an Irish scheme. “This should allow members to decide if they should make extra contributions in order to improve projected outcomes.”
A UK fund put it plainly: “Embrace DC and freedom of choice as the new world (DB should not be on some retrospective pedestal) and stop treating members as idiots who need to be protected from themselves.”
Just under half of those polled are responsible for pure DC or equivalent pension funds, 55% for traditional DB, 29% for hybrid DB/DC and 10% for others. Of those responsible for DB and DC funds, 31% spend more time on DB, 19% more time on DC and 7% an equal amount on each.