DC scheme members may be sidestepping safeguards by avoiding investment pathways and remaining invested in scheme defaults, a new DCIF report concludes.
The report, called A Complex Puzzle: The Investment Challenges Facing DC Schemes Today, explores investment challenges confronting master trusts and DC schemes.
The report finds that while the FCA’s investment pathways were designed to help members better align their investment strategies with their retirement plans, early indications suggest members avoid them and remain invested in scheme defaults. Based on feedback from providers interviewed for the report, most members are avoiding investment paths altogether.
The report was prepared by Richard Parkin Consulting for the DCIF.
Tax-free cash recipients can invest using investment pathways, choose their investments, or leave their investments alone. However, the majority of them appear to be choosing to stay invested, the report says.
Pension freedom has added significant complexities to DC plans, especially those that allow members to remain invested while drawing income. Researchers found that many schemes assume members will do this, but the investments used to support this vary greatly. For example, the level of growth assets at retirement can range from 15 per cent up to over 50 per cent.
Another issue addressed in the report is how to provide investment sophistication while remaining competitive. As the total assets under management of schemes grow, the gap between what schemes are willing to pay for investment management and what asset managers need to charge to operate profitably will close. This will enable schemes to move beyond purely passive investments in traditional asset classes.
Richard Parkin says: “This report highlights the many challenges facing DC schemes as they seek to deliver great retirement outcomes for members with very different needs. Retirement planning is one of the most difficult areas of financial services. Delivering what members need in such a cost-constrained environment and where engagement levels are so low is a near-impossible task. But with full advice out of the reach of most members, and with schemes needing to retain assets to support profitability, finding effective retirement solutions for DC has to be a priority.”
DCIF chair Elaine Alston says: “While the landscape for DC investments is challenging, we’re reassured by the report’s finding that, as schemes grow, many of these problems will diminish. For instance, as members’ pot sizes grow, they are likely to get more engaged, helping schemes to personalise their offerings. As collective assets under management grow, schemes are more likely to embrace more sophisticated investment offerings.”