• Home
  • Admin/Tech
  • Benefits
  • Buzz
  • DB
  • DC
  • Diversity
  • Investment
  • Law & regulation
  • Risk reduction
  • Events
  • Whitepapers
  • ESG spotlight
  • PPTV
  • Newsletters
  • Sign in
  • Events
    • Upcoming events
      event logo
      Risk Reduction Forum 2019

      The Risk Reduction Forum seeks to arm trustees and scheme professionals with practical insights around best practice, and takeaways they can apply to their own scheme

      • Date: 14 Mar 2019
      • Radisson Blu Bloomsbury, London
      event logo
      Rising Star Awards 2019

      Professional Pensions has launched its inaugural Rising Stars Awards to celebrate the emerging talent in pensions

      • Date: 27 Mar 2019
      • Proud Embankment, London
      event logo
      Defined Contribution Conference 2019

      This exclusive one day conference will provide a comprehensive overview of the evolving DC landscape, and examine how Trustees and Pension Scheme Managers can overcome the challenges they face

      • Date: 24 Apr 2019
      • The Bloomsbury Hotel, 16-22 Great Russell St, London WC1B 3NN, London
      event logo
      UK Pensions Awards 2019

      Make a date in your diary. These awards are the single largest gathering and a veritable 'who's who' of the corporate pensions industry in the UK.

      • Date: 23 May 2019
      • Hilton Park Lane 22 Park Lane, Mayfair, London W1K 1BE, London
      View all events
      Follow our Professional Pension Events

      Sign up to receive email alerts about our events

      Sign up
  • Whitepapers
    • How DC schemes can gain exposure to different asset classes in a low-return environment

      So far, DC plans have largely been focused on the onset of auto-enrolment and changes to the regulatory framework - be it the ‘charge cap,' ‘pension freedoms' or consultations around ‘value for money', says Annabel Tonry, Executive Director at J.P. Morgan Asset Management (JPMAM).

      Download
      Pension freedoms three years on

      In 2015 George Osborne, then the UK Chancellor of the Exchequer, decided that those age over 55 could take much more of their pension in cash. This has since opened up a range of possibilities for DC scheme members in the world of pensions.

      Download
      Find whitepapers
      Search by title or subject area
      View all whitepapers
  • ESG spotlight
  • Sign in
    •  

      You are currently accessing ProfessionalPensions via your Enterprise account.

      If you already have an account please use the link below to sign in.

      If you have any problems with your access or would like to request an individual access account please contact our customer service team.

      Phone: +44 (0) 1858 438800

      Email: [email protected]

      • Sign in
     
      • Newsletters
      • Account details
      • Contact support
      • Sign out
     
  • Follow us
    • RSS
    • Twitter
    • LinkedIn
    • Newsletters
    • YouTube
  • Register
  • Subscribe
Professional Pensions
Professional Pensions
  • Home
  • Admin/Tech
  • Benefits
  • Buzz
  • DB
  • DC
  • Diversity
  • Investment
  • Law & regulation
  • Risk reduction
  •  

    You are currently accessing ProfessionalPensions via your Enterprise account.

    If you already have an account please use the link below to sign in.

    If you have any problems with your access or would like to request an individual access account please contact our customer service team.

    Phone: +44 (0) 1858 438800

    Email: [email protected]

    • Sign in
 
    • Newsletters
    • Account details
    • Contact support
    • Sign out
 
 

Sponsor content:

What's this?

This content has been provided by our sponsors and is a paid advertisement.

alt=''

  • Investment

Rethinking DC default design: Budgeting for behaviour

  • David Bint
  • Tweet  
  • Facebook  
  • LinkedIn  
  • Google plus  
  • Send to  
0 Comments

David Bint of Standard Life Investments explains the importance of taking behaviour into account when designing a default fund

For those designing a suitable default investment strategy for a defined contribution (DC) pension scheme, an important issue to consider is members' behaviour. The investment result of the pension scheme during the early years has very limited impact on the final retirement outcome but can hugely influence members' faith in the value of long-term saving and investment. We know that the best DC results come from early and material commitment to appropriate levels of pension contribution. Poor experience is likely to blunt any appetite for pension savings and, at worst, lead to complete disengagement. 

A study of 25,000 UK DC pension savers in December 2007 and September 2009 (that is, immediately before and after the financial crisis) found that contribution rates, which had been trending upwards during preceding years, fell in the immediate aftermath of market lows (NEST: Improving Consumer Confidence in Saving for Retirement 2014, see chart below).

Fund activity of actual DC savers before and after the credit crunch

For members to remain engaged, the default must not only deliver good consistent outcomes but must also match their risk expectations.

Another critical challenge for scheme providers is that there is no one default design that will optimally meet the needs of all its members. That being the case, how do we decide whose needs are paramount? In our view, it is a mistake to try to cater for the ‘average' member; the wealthiest have means and access to independent advice and so will remain in the default only if it happens to be aligned with their needs. Those who make little or no commitment to the scheme in terms of contributions cannot reasonably expect to rely heavily on the outcome. The needs of these two groups should not therefore be foremost in the design of the default investment strategy. 

Committed savers first

The default fund is the engine of growth that is vital in delivering a good outcome for those who are truly dependent on the scheme to sustain their living standards through retirement. We argue that default fund design should prioritise the needs of committed savers, the ‘squeezed middle' who are most dependent on a favourable outcome but have limited resources. With this in mind, how can we change the default strategy to materially improve the results for this group? 

We challenge the traditional DC default ‘lifestyle' approach geared towards tax-free cash and annuity purchase. Now that we have pension freedom, annuity purchase is uncommon. Rather, we should provide for the reality of continued investment activity into retirement, that much is clear. However, equally anachronistic is the typical cash pot that is typically built up in later years to provide tax-free cash at retirement. 

For the squeezed middle, for whom the pension is critical and likely to be only just adequate, these assets are unlikely to be spent rashly. We question the logic of building up a large and unproductive cash pile in the lead-up to retirement. It would surely be more beneficial for these assets to continue being invested for growth through into retirement to seek a better outcome.

In our new paper (Rethinking DC Default Design - budgeting for behaviour) we show how ‘tax-free assets' in place of tax-free cash would work in practice. We also explore members' behaviour and why it is vital to take it into account when designing the DC default investment strategy. 

The value of an investment is not guaranteed and can go down as well as up. An investor may get back less than they invested. Tax rules may change.

To find out more, visit www.standardlifeinvestments.com/dc

 

  • Tweet  
  • Facebook  
  • LinkedIn  
  • Google plus  
  • Send to  
  • Topics
  • Investment
  • Industry Voice
  • SLI
  • Standard Life Investments
Back to Top
  • Contact Us
  • Marketing solutions
  • About Incisive Media
  • Terms and conditions
  • Privacy and Cookie policy
  • RSS
  • Twitter
  • LinkedIn
  • Newsletters
  • YouTube

© Incisive Business Media (IP) Limited, Published by Incisive Business Media Limited, New London House, 172 Drury Lane, London WC2B 5QR, registered in England and Wales with company registration numbers 09177174 & 09178013

Digital publisher of the year
Digital publisher of the year 2010, 2013, 2016 & 2017