The future is defined contribution (DC). As defined benefit (DB) schemes close, over eight million people are now saving into defined contribution (DC) schemes because of auto-enrolment, according to the Pensions Regulator’s Declaration of compliance report, published in July 2017.
Two factors particularly affect DC savers’ retirement outcomes: contribution rates and their scheme’s investment strategy. Yet all too often, DC investment can fall to the bottom of the to-do list. With so much else to focus on, from funding DB commitments to complying with auto-enrolment, this is understandable. However, with auto-enrolment well underway, it is time for attention to turn to where savers’ money is invested.
Each pension scheme will have its own unique membership, and one investment strategy will not always fit all. However, there are some universal issues each scheme should consider.
Investing in a diverse range of asset classes is key. This means that in the event of market turbulence, members have a better chance of being protected from investment losses.
At present, DC schemes find it difficult to access a wide range of investments. For instance, investment platforms’ requirement for daily pricing makes it difficult to incorporate illiquid asset classes, scheme decision-makers said in a November 2017 research report, Investment strategy: A bird’s eye view, which was carried out by Professor Andrew Clare of Cass Business School for the Defined Contribution Investment Forum (DCIF).
Schemes should carefully consider the relationship between cost and value. At present, DC schemes often make investment decisions based on cost, rather than the overall value that a diversified range of investments could deliver to members, according to the same research.
The relationship between cost, value and risk will evolve over members’ lifetimes. At the start of a member’s saving lifetime, growth is key, and savers have longer to weather, and ultimately benefit from, the market’s ups and downs.
As members approach retirement, schemes should consider helping them to transition into more sophisticated strategies which help to control volatility. The latter strategies may have a higher cost but the insulation they provide could well be worth the price tag, helping to assure more comfortable retirements for many.
Louise Farrand is executive director at the Defined Contribution Investment Forum (DCIF)