DC failure on turning members into ‘investment experts’

Defined contribution investment strategies must focus more on member outcomes and less on turning savers into investment experts to succeed during auto-enrolment, consultants say.

Speaking this morning at a Professional Pensions conjecture debate, the panel said the industry had tried to too hard on educating savers about financial instruments when picking DC investment strategies rather than focusing on what they needed in retirement.

Aon Hewitt DC consultant Martin Knight said: "We've typically looked at investments in a similar way to how DB schemes would look at them, by asking have we got the right manager, is the manager performing.

"We haven't really looked at it from the member perspective - on what risk they are facing in retirement and the risk they will have lower pensions."

DC investment strategies often differ from DB strategies due to the difference in their liabilities.

But Bluefin head of technical, marketing and research Robin Hames said DC investment design should be assessed on par with DB scheme performance and had been only tested during times of market stress, which had distorted its performance.

"DC has evolved at the same time as a ten to 15 year period of very challenging investment returns in the market. The equity market has been poor for any personal investor", he said

"We should put design in the context of saying the DC investment profiles in place have only been tested during pretty awful investment periods for anyone where they've had a significant amount of money in equities."

Other consultants on the panel, which debated the impact of auto-enrolment on the industry, said technology could be used help translate what members wanted in retirement into more nuanced investment thinking.

Scottish Widows head of corporate propositions Pete Glancy said: "We need to give them help and empower them. There are technology tools out there to help people assess their attitude to risk and overlay what that might mean in terms of outcomes in retirement."

The views were echoed by JLT Group head of technology product strategy Martin Freeman who said technology was needed to engage in a way to get people to give answers which would infer an appropriate investment strategy.

Auto-enrolment is set to be rolled out to large employers from next year with several staging dates, based on employer size, set for the next five years.

Hymans Robertson head of DC consulting Lee Hollingworth said firms should start planning immediately by establishing a working group and appointing a project sponsor, such as their chief financial officer, to give auto-enrolment more leverage on company agendas.