What challenges does the ‘lower for longer’ environment present both DC members approaching retirement and the wider asset management industry?
Matthew Bullock: A client’s return expectation can be too high, because I know we get asked questions all the time about trying to create a strategy that delivers 8%, 9%, 10% return with very low volatility, and that’s not going to happen. There’s not enough return out there.
Emma Douglas: It’s the contribution problem. If you had more money going in, that would make a much bigger impact on solving the DC crisis. Investment is important, but it’s a second-order problem.
Neil Latham: People aren’t saving enough. They join schemes paying contribution levels that are too low, and they mistakenly think that once they’ve joined it’s all going to be okay, and it probably isn’t.
How far should contributions rise?Douglas: Certainly 12% was what the adequacy report from the PLSA [Pensions and Lifetime Savings Association] recommended as a minimum. We all know 8% isn’t enough.
Dean Wetton: It’s even harder because what you’re saying to members is, “Every pound that you want to spend in retirement is pretty much every pound you’re going to save now, because there’s no growth.”
Latham: If you don’t deliver a reasonable return above a risk-free rate, then people will not continue to save – they’re conscious of the charges, and everyone’s telling them that charges are too high. They’realso conscious that this money is locked away and they can’t touch it until later. So, the negatives of longterm saving can start to appear to overwhelm the positives.
Alan Pickering: As a trustee, my current concern is the exit strategy rather than the input challenge. People in their 50s and 60s might even lose nominal value on a cash account. What do you do for people who are facing the challenge of freedom and choice in a completely different environment? Had it been 8%, 9%, 10% return environment, it would be a lot easier to help them through that transition. With negative returns, it’s a double-whammy.
Ben Piggott: What you’ll find is that there won’t be a cliff-edge retirement date anymore. There’s just going to be a great transition into people working longer than they expected, and employers probably having to facilitate that with part-time working and flexible working hours.
Wetton: The challenge for the wider asset management industry is, in a higher return environment, it’s easy to have relatively high fees. But in a low risk-free rate with low returns, those fees, at the same rate, become a much bigger proportion. And you’re effectively then competing with sticking the money in the bank, which is essentially free.
Piggott: Yes, and for the DC member, it’s a double whammy. So, although we’re looking at the investment side and the growth side, the other part of your balance sheet, your student loan, your mortgage- they’re not going to erode away as quickly by inflation. So, it’s going to take you twice as long to save, twice as much effort to save, and twice as much effort to pay down that debt.
Pickering: It just adds to that negative mood music. “I’m not going to save, because those folk down in London say I’m being ripped off.” And then I’ve got to say, “No, no. You’re in a master trust, we’re keeping the costs down. It’s really, really good.” But I’ve lost it if the newspapers say, “Pensions are a rip-off.”
Douglas: That’s what worries me. We can get ourselves worried about how awful this message is, and then we’ve got to communicate that to people who aren’t used to dealing with these kinds of things anyway. And it’s really difficult to be honest but reassuring in such a way that people don’t just think, “Oh, well, I’m just going to give up, then. That’s hopeless. So, I’ve got to save £10,000 to have £10,000 in retirement, and you’re telling me that that’s going to buy me an income of £300 per year?”
Bullock: In the shorter term the focus on fees is a good thing. However, the question isn’t so much how much you’re paying. It’s the value for money that you’re getting with that. The biggest risk of the focus on fees is to create poorer products to make sure we meet that criteria, which may not be the better thing in the longer term. At some point, when we do see a resurgence in market volatility, we want to make sure people are positioned well for that, and haven’t just gone into the cheapest product.
Latham: Is that real? Or is that the spin the investment management industry would put on things; to say, “Oh, you’re constraining our cost-cap. That means we’re going to give you worse value.” Douglas: It’s the asset classes you can’t invest in that worries me, in terms of constraining the fees. For a standard developed equity market fund, you shouldn’t have to charge that much. But surely, we should be looking to add in other sources of return, particularly in this very low interest rate environment.
