Speakers and delegates at portfolio institutional’s DC investment conference review the industry’s report card and discuss ways to improve delivery and performance of defined contribution investments.
The move to DC has focused governments in every developed country on the nature of individual advice and how it can be regulated. However, advice – even good advice – is all based upon Markowitz’s theory which seeks maximum returns on savings while maintaining volatility as low as possible, and this model is “wildly deficient”, said Michael Dempster, professor emeritus, Centre for Financial Research, University of Cambridge in his keynote speech at the portfolio institutional 2016 DC Investment Conference.
Dempster said flexibility is the key to a good pension pot that will last – more or less – a lifetime. If DC schemes offered individualised advice on that basis – and some large firms are looking at doing this – then this is a possible goal for most people. Dempster said that “goal-based, individualised, activity maximisation, which looks at the highest probability of achieving goals” is how people should consider their savings. “Retaining flexibility post retirement is 88% better than what is normally advised,” he added.
COPING WITH REGIME CHANGE
In the first panel session on Saving under a new regime, Graham Vidler, director of external affairs, Pensions and Lifetime Savings Association (PLSA) said the problem with the data that has come out of the freedom and choice is that those individuals are “far less wealthy, less engaged with advisers, less confident and much more in need from us in the industry”.
Pensions Policy Institute director, Chris Curry, agreed that the data doesn’t show the characteristics of those individuals, such as whether they have DB elsewhere and so there remains a lot of uncertainty.
Andrew Cheseldine, partner, LCP said you can get granular data, but what must be resisted is making too many assumptions without understanding how the different data interacts.
“Looking at everyone’s research, our view is that people are generally making very good decisions,” he said.
NOW: Pensions director of investment and product development, Robert Booth, said only 1% of his membership registers on the website.
“A lot of people don’t want advice, don’t want guidance, but want to be directed,” he said.
For this reason, a default is required for the scheme to be able to indicate to members what they think is a reasonable outcome.
“The lesson we need to take from the previous process was piling information onto people didn’t work and doesn’t work now,” added Vidler.” They need more direction and like to feel part of a crowd.”
KEEP IT UNDER YOUR CAP
The second panel looked at the issue of Delivering the goods under a charge cap.
PTL managing director, Richard Butcher, made the point the whole policy of a charge cap was “wrongheaded”, saying there was a governance – not charging – problem that needed to be addressed.
“If you have effective governance, the charge should be appropriate.” said Butcher.
Lydia Fearn, head of DC and financial well-being, Redington, said some schemes had been impacted more than others, especially where paying for both administration and management fees.
Investment Association director, public policy, Jonathan Lipkin, said the cap was a reality and it was important to realise it has reinforced the existing debate about “cost being king” and that members get very different outcomes from different types of scheme.
“We can’t have a meaningful discussion about charges unless we look at the performance of present and past DC funds.”
Mercer principal, DC & savings, Stephen Budge, believes the charge cap will be applied to drawdown and sees it as “a mastertrust play”, because it provides a whole of life scheme in which to accumulate and decumulate.
KEEP ON STRAIGHT AHEAD
The final panel on Investing for the future, addressed how even now, one legacy of poor DC governance is that there remains a considerable bias within schemes towards domestic equity.
Royal Mail Pension Trustees DC plan secretary, Ben Piggott, explained how Royal Mail’s DC scheme has become more diversified since 2008 and is now 60% multi-asset and 40% equity, mostly global market cap.
AB head of pension strategies, multi-asset solutions, David Hutchins, said that UK equity has the highest costs and if transaction costs were included in the cap, it would push people away from a home bias simply on stamp duty. He said he was concerned about behaviour among trustees, advisers and asset managers that led to many schemes derisking into DGFs.
“In most cases, there wasn’t a well-framed set of objectives in place, and when they didn’t work, strategies were changed without understanding the objectives.”
“We tend to look more at member outcomes,” said Joanna Sharples, principal, Aon Hewitt. “So, if we have a key target such as replacement ratio, it is an effective way of monitoring, is outcome-specific and can allow trustees to spot things going on in the underlying markets that might derail the strategy.”
