Defined Contribution

Schroders Defined Contribution Conference 2016 - summary

We held another packed Defined Contribution Conference at the Royal Institute of British Architects (RIBA) in London on 19th May. After two years of upheaval, our meeting took place against a more serene background this year, with further radical reform of UK pensions legislation on hold for now. However, there were still plenty of other pressing issues affecting defined contribution (DC) pension schemes which we touched on during the course of our discussions.


A smarter path to retirement outcomes

The typical DC glidepath, which gradually derisks a saver’s portfolio from equity into bonds, helps smooth the savings journey, but does it lead to a better income in retirement? We put it to the test:

  • We found it performed, anything, slightly worse than a typical 60% equities/40% bonds balanced portfolio in terms of the range of retirement incomes likely to be achieved
  • Against a simplified “active” strategy, it performed significantly worse, assuming a skilled manager, and even one with no skill performed no worse than a glidepath portfolio
  • It follows that, if an investor can find a manager with genuine skill, it is worth paying for and the more skill the manager delivers the higher the fee that can be justified.

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Responding to the DC investment challenge

The DC saver's journey falls into three phases: growth, when they need reward; stable growth, when there is a balance between risk and reward; and transition to retirement, when they need less risk:

Growth phase:

  • 'Smart beta' seems to offer the opportunity to achieve performance with low fees, 
  • Schroders’ advanced beta portfolios can be constructed to deliver bespoke “baskets” of stocks to target specific themes
  • The result is equity-like returns, but with lower volatility, which should be ideal for the investor in the growth phase.

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Stable growth:

  • Even low levels of growth can have a significant impact on outcomes at this stage as pots tend to be a larger
  • While aiming for strong returns, the investor also needs to be increasingly aware of risk, given the limited time available for losses to be recovered
  • We try and improve the odds for savers by diversifying, adjusting asset allocations to suit economic conditions and seeking to manage downside risks.

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Transition into retirement:

  • Savers in their later years need safety above all else, but enough growth to combat inflation, so diversification provides a cheap solution
  • But diversification by asset class may not always provide diversity of risk when, for instance, equities and bonds move together after the same external shock
  • To provide better protection, investors need to be aware of the economic environment and could benefit from “insurance” using volatility management.

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What do schemes want? - The view from Schroders

We know that schemes want to improve outcomes for savers. We believe that means they should make investment an important part of their governance process:

  • Our research suggests workplace schemes can be divided among “genuine carers”, those seeking a competitive edge, and the “box tickers”
  • Effective implementation requires prioritisation, allocation of resources and engagement with members: investment managers can and should form part of this equation
  • But asset managers need to break down barriers with clients, becoming trusted and collaborative suppliers who help make it easy to integrate investment into governance.

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What do schemes want? - The view from the member

We commissioned research to find out the attitudes of DC scheme members from Bdifferent, a specialist market research firm:

  • In terms of perception, members see stocks and shares as high risk, but pension savings as low risk, with the implicit assumption that they come with a guarantee
  • What people want is less confusing information and some degree of certainty at retirement, but most do not really know what they want
  • Asset managers can boost engagement by making investment understandable: encouraging understanding, explaining how dynamic it is, building trust and making it personal.

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