Defined Contribution

Are the trees getting in the way of the wood?

As an industry, we are sometimes guilty of concentrating too much on the detail. This can make us forget that our primary duty is to strive to ensure members receive an adequate pension when they retire.


Tim Horne

Tim Horne

Head of UK Institutional Defined Contribution

As an industry, we are sometimes guilty of getting too bogged down in the minutiae. We sometimes forget that the main reason we are here is to ensure members have enough for a comfortable retirement. Costs, value for money, pension freedoms, risk versus return and all the other details are of course important, but they can sometimes become ends in themselves, rather than means to achieving that one, over-arching goal.

There is little dispute about the three key issues that any pension scheme needs to address if it is to meet that goal satisfactorily:

  1. the amount of contributions
  2. the length of time they are invested; and
  3. the investment return they achieve.

Both government and industry are already spending a great deal of time and effort on items 1 and 2. Auto enrolment and a raft of publicity campaigns bear witness to the energy being put into making people aware of the benefits of pension saving over a working life. These are, of course, laudable and worthy of our wholehearted support. They are often, though, the main focus only because they are relatively easy to measure and tackle. Item 3 is a much more difficult judgement to make (except in retrospect) but no less crucial, we would argue.

The problem here again is that the detail – costs, charges, contributions – often presents the line of least resistance. Decisions on such matters are much easier to make, measure and change than those that involve predicting the outcome of investment choices. Yet, if we go back to our first principle, isn’t that what we need to try and do? Indeed, isn’t it what our members would expect us to do?

In an ideal world, perhaps, members would manage their own pension savings. One reason they are happy to entrust their money to our care instead is, we suggest, an expectation that we can offer a higher level of management expertise than they could achieve on their own. In simple terms, they expect, not unreasonably, that the experts should be better equipped to steer their investments.

This expectation can’t be met simply by ensuring the details are in place and the boxes ticked, important though those boxes may be. Steering a portfolio effectively over a 20-, 30- or 40-year saving journey will require adjustments to the course to be made along the route – a set-and-forget strategy is unlikely to leave members satisfied at the end.

But as well as having a good pilot, we would argue that having the right vehicle for the different parts of the journey is also vital. At the beginning, when members can withstand more risk, a more growth-oriented portfolio. In the mid stage, when the effect of losses looms larger, a portfolio more balanced between growth and security. And, in the pre-retirement phase, when avoidance of loss and flexibility become priorities, a lower-risk portfolio should be the first choice.

We would argue that these questions are likely to move up the list of priorities for DC schemes. Given the inadequacy of many individuals’ pension arrangements, squeezing more from less will become increasingly important. That means likely investment returns should not be neglected. Yes the measurable details matter, but we think trustees and members of independent governance committees should not lose sight of the ultimate prize: the need to give members adequate pensions. In doing so, they will have to exercise judgement about likely outcomes and decide who is best placed to help them achieve those outcomes in the best interests of their members.