Schroders’ Defined Contribution Team lead by Stephen Bowles, Head of DC, shares its Top 10 Tips for successful DC investment management:
1. Outcome: It's important to focus on the projected level of pension in retirement, rather than short term fluctuations. This applies to both the investment strategy and the way you communicate to members.
2. Transfer the Risk not the Responsibility: Experience has shown us that members are reluctant to make investment decisions. It is essential that there is a robust governance framework in place to monitor all aspects of the default investment strategy.
3. Governance: More savers than ever before and an increased focus on the DC market have lead to more interest from the Pensions Regulator and the DWP. Governance guidance is currently provided but we believe regulation will follow.
4. Be clear on the objective of the default fund: Take into account both risk and return, growth and future volatility. For DC members risk and return should be considered in absolute and real terms rather than relative to an arbitrary list of stocks.
5. Understand the risks: Passive equity is not a low risk option. It may well have a place within an investment strategy but passive investing should be an active decision, in consideration of the risk and return objective alongside cost, rather than just a cheap default decision.
6. Consider your glide path: The value of ‘investment at risk’ grows significantly as members move through their 30s, 40s and 50s. The design of the glide path and the investment building blocks utilised should take account of this.
7. Costs do matter: But context is everything – managing fee levels should not be ignored but make sure they are assessed in the context of value for money.
8. Information overload: Ensure the information you provide is appropriate for the audience. All of us have limited processing capability, therefore as a scheme sponsor or Trustee knowing which information to pass onto members is essential – make sure it focuses on ‘what’ rather than ‘why’.
9. Auto enrolment: This is so much more than an operational problem – a new audience is on its way into DC schemes, this audience will require new investment solutions, as well as robust operations.
10. The future of DC: Nothing stands still for ever, DC is no exception. Over the past decade, schemes have been growing and maturing. While it has been sensible to focus on accumulation solutions, the day when de-risking will dominate DC is only just around the next corner.
Stephen Bowles, Head of DC, Schroders comments:
“We have a huge task ahead of us within the defined contribution sector, however we’re making strong headway with innovative solutions and that’s encouraging.
“DC has got to become a priority for everyone involved in pension management. We’re here for the long-term and will continue to beat the DC drum.”
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