Talking heads: Ahead of the curve

Spokespeople from Cerulli, Smart Pension, Now: Pensions and BNY Mellon offer thoughts on some of the more salient issues in pensions, including investments, access and ESG.


What are some of the salient trends you see in the DC marketplace in regard to investment and communications?
Since the April 2015 “freedom and choice” reforms, DC members are now able to choose between annuitisation, cash and drawdown. The difficulty of predicting individuals’ future behaviour has led many providers to design default funds that avoid specific outcomes and instead have a mixed-asset allocation at retirement. Such funds allow members to select any of the three available options.

Research by Cerulli found that 81.8% of asset managers currently have multi-asset included in their default fund offering, while 50% of respondents plan to increase the allocation to multi-asset over the next 12 to 24 months. Equities continue to be the most popular asset class in default funds, but the majority of asset managers expect to increase allocations to emerging markets debt and smart beta exchange-traded funds.

DC schemes’ principal concerns are around member behaviour and member engagement, and their needs therefore differ from their DB peers. Whereas DB pension schemes might look for a standalone investment solution, DC schemes expect a more holistic approach to pension provision. Asset managers that not only offer investment products, but that can also provide support on communication, member behaviour research, administration, and other aspects of pension provision will have a competitive advantage.

Managers also report an increased interest in environmental, social, and governance (ESG) investing, although a considerable number of DC schemes are still unsure as to why they should include ESG; managers can therefore also play a role in helping schemes figure this out. Other frequent client requests centre on including illiquid investments into default funds. Over the next few years, Cerulli therefore expects to see greater access to illiquid investments and more ESG in DC default funds.


What can be done to save people from outliving their pension income?
Auto-enrolment in the UK has kick-started people saving for retirement. Millions are now saving for the first time – or beginning to save more. But key questions about adequacy remain and fundamentally you can only retire on what you’ve got.

Yes, investment growth can do some of the heavy lifting, but ultimately you only get out what you put in, and we know far too many people are still under-saving for their retirement. Then there is the question of how best to access your money when you reach retirement and here more work is needed to give people the options that suit their needs and wants.

The inherent dangers around pension freedoms versus the barriers and cost of obtaining advice on what could be relatively small pots needs to be countered with a simpler, much more straightforward and accessible option, such as flexible at-retirement pathways. These pathways can offer an important solution to ensure that people’s savings are used most effectively to finance short-term and longer-term needs in retirement, including generating a regular income where that’s what the saver needs.

The way we are thinking about this is in terms of a so-called ‘four-pot solution’ based on individual data and choice. This borrows thinking from ‘mental accounting’ and is designed to present options to people in a way that they think about managing their money.

The options that we are working up includes ‘active years’ up to 80, ‘later life’, a portion designed for post-80, a ‘rainy day’ pot for additional expenditure and ‘inheritance’, where pension cash can be saved for children, etc, if desired. Powered by technology, simple decision-making tools will help people make the choices they need to make at retirement.

The beauty of this kind of simplicity is that it gives people the confidence and flexibility to allocate their money most effectively and make the most of their retirement savings. Importantly, any solution has to have a degree of flexibility so as not to lock people into the wrong long-term solutions at the start of their retirement. Our initial user testing of this concept has been very favourable, indicating that approaches such as these could be a useful way to help people safely budget for retirement without inadvertently exhausting their savings.


Are default pension schemes easy for employers to compare?
Comparisons of investment approaches are seldom straightforward, with the season and the economic climate having a habit of influencing feelings and tempting even the most diligent of decision-makers to jump into rough waters. And yet, many commentators trip over themselves to express strong opinions which accompany regular performance comparisons.

It’s a little surprising to read some of the enthusiastic judgements drawn from comparisons made in the grip of a stock market stampede which has made the bulls of Pamplona look lethargic. Such comparisons are regularly presented to employers as evidence on which to base their decisions.

Those decisions will have a lasting impact on their staff and are likely to determine when they might be able to afford to stop working, and the quality of their retirement.

Investment approaches are not easy to compare. That’s why investment consultants are important. At one end are sophisticated strategies that benefit from continuous oversight and regular adjustments, while at the other are investment mandates that are bought cheaply then largely ignored.

The latter have delivered attractive returns over the past few years while stock markets have continued to enjoy a very long summer. But what happens when summer’s lease reaches its sell-by date? As the investment world struggles with that one, how can employers possibly be expected to answer it?

The only thing we can be sure of is that winter follows summer.


ESG issues have become a big theme for the asset management industry in recent years. Are DC pension scheme members ready to engage with it?
We are seeing growing interest by asset managers in sustainable investment, encouraged in part by the UN’s Sustainable Investment Goals and the EU’s proposals for a common framework for defining, reporting and measuring sustainable investment. ESG is going mainstream.

At the same time, the typical DC pension scheme member remains notoriously unengaged with their investments.

According to figures from the UK’s Pensions Regulator, 92% of DC pension savers invest via a default fund. Default strategies ensure a sensible approach is taken to balancing risk and return, but they are like an automatic pilot, providing few reasons for members to take an active interest in how and where their pension investments are being invested.

Actively managed ethical fund options are a niche interest.

But that does not mean that asset managers’ increased emphasis on ESG is wasted on DC members. Instead of providing specific ESG products, asset managers are integrating ESG into their investment processes.

They are making ESG part of the service, not an extra with associated costs. And this chimes well with the changing attitudes of pension investors, particularly younger generations who are showing a greater appreciation of ESG issues, even if their views are not necessarily matched by action – such as actively seeking out ethical funds.

For example, BNY Mellon’s Generation Lost research found that 95% of millennials feel that pension funds only provide limited, poor or no options for investing in social finance products.

The ability of DC providers to demonstrate that ESG issues are viewed as part of their default fund investment process may go a long way to ensuring DC pensions themselves remain a sustainable retirement savings solution.

©2018 funds europe



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