An argument currently seems to be raging: should defined contribution (DC) fund design be simple or complex? Is there really a right or wrong answer? Let’s face it, all investment funds can be complex to the average person in the street. Surely it is dependent on the requirements of a particular scheme, its design, the governance, the oversight and ultimately – and most importantly – what the best solution is for members.
I don’t believe anyone would disagree that auto-enrolment has become one of if not the major catalyst in driving innovation in DC fund design. But what is also certain, is that it doesn’t matter about the financial sophistication of the membership, or who the employer is, as in most instances for a DC scheme, the take up of the default fund exceeds 80 per cent.
Innovation is, I believe, the watch-word; in both design and member engagement. So whether you are the employer, trustee, adviser or the solution provider, the onus is on you to deliver on both counts.
From an investment platforms perspective, we are seeing a broad range of requests for delivery of default funds. From the ‘pre-built’ off-the-shelf solutions, to complex fund design and builds that deliver a simple to understand outcome,
like target dated funds, through to build of bespoke default funds for schemes.
What is clear is that the ability to design and deliver a default fund that meets particular scheme requirements is key to member engagement. Let’s not forget that default fund design is now high on the Regulator’s watch list.
It is also interesting to see that the innovation in pension fund design that we have seen in the defined benefit (DB) sector for a number of years, is clearly manifesting itself into new solutions and thinking, which are being delivered in the DC market. Investment firms with intellectual skill sets, such as liability matching, are looking to use their knowledge in a wider environment, and solving DC member’s investment problems is just one example of this.
There are a small number of ‘institutional investment only’ platforms that deliver compelling solutions to both DB and DC, from complex blending and fund constructs, to utilisation of market leading liability driven investment (LDI) strategies and exchange traded funds (ETFs).
Access to alternative assets is a crucial part of delivering scheme specific solutions for all sizes of DB and DC schemes. This allows scheme sponsors and their advisers to deliver appropriate asset classes to meet the schemes investment aims, whether DB, DC or even both.
There are some compelling reasons why DB and DC pension schemes might want to consider using ETFs. They have opened up investment areas of the market previously inaccessible to most schemes. As part of a blended fund solution for example, the ability to access areas either not well served by the mutual fund industry, or where liquidity is an issue, this could be achieved for schemes via ETFs.
As mentioned earlier, the skills of liability driven teams are now being used to address issues in both the DB and DC world, and we fully expect to see clients who were previously unable to access this skill set, because of their scheme size, now able to do so via innovative platform design.
In addition, this will allow clients and their advisers to mix and
match managers, to deliver an even more targeted solution for their scheme.
With innovation also comes choice. But too much choice can confuse the buyer, and this is where of course the corporate adviser needs to step in. Pensions have never been more newsworthy; auto-enrolment, changes to the State pension, and clients (companies and members) are much more aware of their responsibilities to provide a sustainable income in retirement.
As the size of the problem becomes more apparent to everyone, investment providers are being attracted to the design of solutions to help solve this problem. The role of the corporate adviser is as much about matching the right investment solution to the client as the pension providers themselves..