Defined Contribution

Cap the charge and smooth the path to better outcomes for your DC members

Amidst the welter of changes facing defined contribution (DC) pension schemes this year, one of the most pressing is how they deal with the government’s new charge cap. Trustees and employers have only until April to ensure that charges for their  scheme’s funds come in below the 0.75% annual limit.


Hilary Vince

Hilary Vince

Defined Contribution Strategy Manager

Amidst the welter of changes facing defined contribution (DC) pension schemes this year, one of the most pressing is how they deal with the government’s new charge cap. Trustees and employers have only until April to ensure that charges for their scheme’s funds come in below the 0.75% annual limit. Luckily, help is at hand. The Schroder Life Dynamic Multi-Asset Fund (DMAF) was specifically designed to offer a low-cost way for DC members to gain access to equity-type growth, but without the normal volatility. We can’t pretend we foresaw the exact details of the new cap when we launched the fund in 2011, but we can say with some justification that we saw the way the wind was blowing.

Three years on, DMAF is one of the few global multi-asset funds available for use in the DC market that uses active asset allocation and yet comes in below the cap. Indeed, at no more than 0.5%, the ongoing charge is a mere two-thirds of the 0.75% limit. And, with its track record, DMAF has proven that it’s possible to provide good results at a reasonable price.

We aimed to give investors an annual return equivalent to inflation (as measured by the Consumer Price Index) plus 4% over a market cycle – typically five years. After just three years the fund has delivered slightly less than our target, at 6%*, but we think that it is still a creditable result, given that the cycle is not yet complete and after a very rocky period for global markets in the year after the fund launched.

Of course, any member whose scheme had adopted the more traditional low-cost default approach of using a passive equity portfolio built around a global index might have done better. But, as most trustees will know, the DC savings journey is a marathon not a sprint. Ensuring that members are not disappointed when they finally reach retirement means keeping them saving for 40 years or more. This is particularly important for middle-aged members, when investment growth and investment stability tend to be equally important. The priority here is not necessarily to give them stellar returns but to try and ensure that performance is steady and that the journey is as smooth as possible. That way the member is less likely to panic and switch to safer investments that won’t generate the growth they need or, worse, stop saving altogether. To create these ‘stable growth’ conditions means, we believe, building a default fund that maximises growth, while minimising nasty surprises.

It’s why DMAF uses a systematic approach that attempts to forestall the shocks that are a regular feature of financial markets. We try and limit big losses by cutting the portfolio’s exposure to risky assets when volatility tops 10%. The overall aim is to keep volatility to between a half and two-thirds that of global equities. This stabilisation mechanism works well with the active asset allocation approach overseen by our experienced Multi-Asset team which manages DMAF.

The lesson of the two bear markets since the turn of the millennium is that keeping a static asset allocation is not the best way to manage a portfolio. So the DMAF team actively manages the asset allocation to benefit from upward moves in the market, whilst taking more defensive positions when the situation changes. The combination of our volatility cap and dynamic asset allocation means, we hope, that members will not be unduly unsettled by the gyrations of markets and – crucially – keep on saving even when times get tough.

Encouraging them to do so means that the scheme must adapt to their needs as they travel along their savings journey. We believe DC members’ need for risk and return gradually shifts as they get older. In the early stage, their need for growth generally outweighs their requirement for protection from risk. However, as we suggested earlier, these needs move into rough balance once members reach their 40s. This is the period when we think DMAF comes into its own.

Members have less time left to them before work income stops, so it is harder for them to recover from losses through regular contributions or investment growth. They can therefore afford to take fewer risks. At the same time, any growth they can achieve should have a much greater compounding effect on what should be a much bigger savings ‘pot’. Indeed, middle age is arguably the best opportunity they have to use these ‘money-weighted’ returns to build their capital.

Unfortunately, unless carefully managed, these objectives can conflict with each other. We believe that DMAF is well placed to manage this conflict. It gives the member access to a range of assets beyond global equities and government bonds that might otherwise be denied them, such as commodities, emerging market assets and absolute return funds. With allocations between these assets actively managed, we can achieve the sort of inflation-beating returns that the middle-aged member needs. At the same time, DMAF’s in-built stabilisers can help protect them from the sort of big losses which are bad not only for their investment returns, but can also sap their morale and prompt them to avoid growth assets or stop saving altogether.

So, we think DMAF is perfectly placed to help trustees and employers at a time when they are under greater pressure than ever to contain charges while still improving outcomes for members. The fund may not answer the needs of members all the way along their savings journey, but we think it well manages the difficult balance between risk and return that members face in their 40s and early 50s. Crucially, it is one of the few default options open to DC schemes that offers active asset allocation within the charge cap. As such, it can truly be said to be actively helping to improve members’ pension outcomes.


*Source: Schroders, at 30 April 2014.

To discuss the themes in this article further, please contact Hilary Vince, DC Strategy Manager at Schroders, on +44 (0)20 7658 5727 or email

About us

Schroders is a global asset management company with £268.0 billion under management and an international network spanning 37 offices in 27 countries. We have significant experience of managing DC assets and of helping scheme managers, trustees and sponsors to operate pension schemes efficiently. We manage assets for DC pension schemes in the UK and also have relationships with institutional investment platforms. With more than £36 billion in assets, managed on behalf of both defined benefit and defined contribution pension schemes in both the corporate and public sector, UK pension funds form a significant proportion of our global client base.

Source: Schroders, at 31 March 2014.

Important information: The views and opinions contained in the article are those Hilary Vince, DC Strategy Manager at Schroders, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

This material is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Pension Management Limited does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Funds which invest in a smaller number of stocks can carry more risk than funds spread across a larger number of companies. The Schroder Life Dynamic Multi-Asset Fund invests in a fund that is authorised as a non-UCITS retail scheme. The investment and borrowing powers of these types of scheme are wider than those for UCITS funds whilst still aiming to provide a prudent spread of risk. The fund invests in assets which are exposed to currencies other than sterling. Exchange rates may cause the value of overseas investments and the revenue from them to rise or fall. The fund is not tied to replicating a benchmark and holdings can therefore vary from those in the index quoted. For this reason the comparison index should be used for reference only. The fund uses derivatives for investment purposes. This involves a higher degree of risk and may lead to a higher volatility in the unit prices of the fund. The Manager employs a risk management process to allow the Manager to measure derivative and forward positions and their contribution to the overall risk profile of the Schroder Life Dynamic Multi-Asset Fund. As part of this risk management process, the manager conducts daily Value at Risk analysis of the fund and performs both stress and back testing of the fund. The fund invests in unregulated collective investment schemes, which involves a higher degree of risk as they are not regulated by the FCA. The funds may not be readily realisable and priced less frequently than listed shares or authorised unit trusts, and therefore price swings may be more volatile. Unregulated schemes may be closed for subscription and/or redemption may be subject to certain restrictions or limitations and there is unlikely to be an active secondary market in the shares or units of such underlying schemes. Some schemes may only be available for subscription or redemption on a periodic basis. The fund invests in alternative investments (including commodities) which involves a higher degree of risk and can be more volatile. They should only be considered as a long term investment. The forecasts included in this brochure should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors. Issued by Schroder Pension Management Limited. Registered in England and Wales 5606609. Registered office: 31 Gresham Street, London EC2V 7QA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be recorded or monitored. w45670