The portfolio institutional DC Investment conference got to grips with the investment challenges arising from the greater freedom given to retiring DC members over their pension pots from this month. The event saw three panels of industry experts engage with audience members, comprising DC scheme representatives, consultants and asset managers, over the end of annuitisation, the fee cap, illiquidity and default design.
WHAT WILL THE END OF ANNUITISATION MEAN FOR DC INVESTMENTS?
What innovation are we seeing in the new products hitting the market?
Aon Hewitt principal consultant, retirement and investment, Anne Swift: The focus is on products that will help members not only to retirement but through as well. Clients are a bit cautious about jumping in so they are waiting to see how the market develops.
Buck Consultants chief investment officer, Simon Hill: There is a lot of focus on how far in advance people are going to be able to decide which route they will go down. More than a couple of years out people are really not in a position to decide.
PTL managing director, Richard Butcher: The consultants and product providers are getting their heads together, but we are not there yet. As a fiduciary trying to deliver stuff to members I am still bereft of tools for this new world.
Hill: At one end you are seeing fully-packaged solutions such as target date funds (TDFs) and at the other, building blocks people can select from to give them the outcome they want. That might include pure equity exposure, lower risk equity exposure and something that generates income.
Swift: None of my trust-based clients are in a rush to offer long-term flexible drawdown. It is about how you go from retirement age into something that will provide income. All trustees can do is get members to a portfolio that has the right combination of growth, income and inflation protection.
Butcher: I can’t see employers wanting to provide drawdown because the infrastructure and the risks are just too great. The threat of a charge cap in the decumulation phase also makes it more difficult.
How will the charge cap affect this?
Swift: It is an issue for small schemes that have had diversified growth funds (DGFs). Some are having to compromise by putting passive equities and bonds in.
Butcher: The charge cap is treating the symptom not the illness. The illness is poor governance – if you have properly informed and effective governance then any charge can be justifiable.
First Bus UK Pension Scheme chairman, Richard Soper: I don’t accept that innovation in fund management is going to be restricted. From our real life experience, it’s the approach to administration [ from platform providers] that’s been holding up prices.
DC AND LIQUIDITY: IS THERE A WILL AND A WAY TO ACCESS LONGER TERM ASSET CLASSES?
Why can’t we have illiquid assets in DC?
Butcher: It’s logistically tricky and there are two constraining factors: daily pricing and scale.
Dean Wetton Advisory adviser, Dean Wetton: You need to distinguish between being able to transact and pricing. You need to be able to value something every day but you probably don’t need to transact every day.
Lyxor head of UK institutional business development, Olivier Cassin: The major issue is scale because some of the large super funds in Australia have managed to add illiquid assets. But for smaller schemes it might be a struggle and it is probably better not doing anything than doing something sub-optimal.
Is daily pricing likely to disappear any time soon?
Butcher: I’m not sure it will disappear any time soon. If you look at the blogosphere and Twitter, people expect to move money at an instant’s notice.
Wetton: The Budget has provided some sense in we can provide more illiquid assets for people with a longer time frame and then in the later stages they should be investing in more liquid, slightly lower-yielding, assets. Platforms are probably not fit for purpose. The portion of the pie going to administration is relatively high because we don’t have enough scale. It is an odd business because you could do it well every day for 100 days, but get it wrong on one day there is a lot of risk – probably the biggest risk the DC market is going to face. An administrator blowing up is going to be a pretty untidy mess to have to pick up.
DEFAULT FUND DESIGN
How have trustees responded to the changes?
Lane Clark & Peacock partner, Andrew Cheseldine: Trustees are between a rock and hard place. They’ve got to decide what members are going to do at retirement, when they’ll do it and what the optimum result for them is. Do you want to build what they should have, what they say they want or what they’re actually going to do? Three quite distinct results. You need to make some decisions but whatever you do there’s a compromise.
Electricity North West head of pensions, Fiona Brown: It’s quite hard to think through what you think members should do, what they think, and how much value you should put on what they think. To put some meat on that throwaway comment: we haven’t had one query. We have always auto-enrolled and we get a lot of forms back that don’t have any kind of investment selection on at all, it’s just a blank form with a signature.
So is there a ‘wait and see’ attitude in the industry?
Schroders DC investment solutions manager, Tim Horne: We’re all waiting to see what will happen, but from an investment management perspective we shouldn’t necessarily say, ‘in that case we’re not going to do anything for three years’, because it’s not beneficial for our own business or the DC market if all the providers say they can’t be bothered because they don’t know what is going to happen. We wanted to have a view and develop a solution we thought appropriate.
The Pensions Trust trustee director, Barry Parr: I tend to think we’re at the beginning of the end for single company DC trusts. The strategy now needs to be much longer term. That’s more likely to be achieved in a master trust or perhaps a very large DC employer.
Comments