UK - Merrill Lynch Investment Managers (MLIM) has launched a new approach for DC schemes known as Target Driven Investing (TDI) which focuses on the target level of retirement income and incorporates member "appetite".
Aimed at the corporate market, TDI is geared to provide an alternative to more traditional DC methods of investment used currently.
According to Andrew Dyson, head of institutional business at MLIM, up to 90% of new members enter into the default or “lifestyle” defined contribution scheme where up until five to 10 years before retirement, 100% of contributions are invested into equities.
To reflect interest rate and market risk an allocation towards bonds and cash are made and increased until equities are fully phased out.
MLIM’s research also found the risks involved using the “lifestyle” approach were not generally understood by members. MLIM claimed one third of members invested in the approach could expect to end up with a pension lower than if their fund had been invested in a risk-free portfolio.
MLIM’s set of tools and products for trustees’ employers and members in DC schemes includes a DC target return investing product, a DC banking scheme and an online modeller.
The DC Target Return (TR) investing aims to generate a target of cash +3% and to preserve accumulated capital. According to MLIM for this to be achieved the fund would be invested in a diversified basket of assets without being constrained to a traditional benchmark.
The banking principle (DC Banking) sets a long term target rate of return measured over a member’s career and introduces a mechanism whereby a proportion of the risky assets are switched into a bond product to lock in the return.
The online modeller allows member to set their pension target and gives them an insight into how it can achieved in terms of contributions, investment strategy and date of retirement.
Steve Rumbles, head of defined contributions at MLIM told Global Pensions that MLIM had plans to create more flexible investment systems that would allow more investment minded members less risk averse platforms to opt into.
Rumbles also claimed the TDI approach could potentially be compatible with the National Pensions Savings Scheme (NPSS) proposed by the Pensions Commission.
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