Trustees say DC is ready to diversify

DC pension fund trustees are looking to diversification and alternative investment funds as they strive to balance volatility and risk for their members. In a survey of DC plan trustees conducted by Engaged Investor in partnership with JPMorgan Asset Management, a significant 41 per cent of respondents said that alternative or diversified funds were suitable for a default fund. However, reality suggests that few to date have implemented such a strategy.

Default funds top choice for pension investors, yet not suitable for all

With DC schemes collectively accounting for 34 percent of all pension funds*, default funds are seeing a significant proportion of this investment. Indeed, according to the survey, of the 70 per cent of schemes offering a default fund, 80 per cent of members select it. Despite this, only 36 per cent of trustees feel their default fund is actually the best option for members, emphasising the importance of these funds offering the right options.

*Watson Wyatt Global Pensions Asset Survey 2008

Simon Chinnery, Client Advisor in JPMorgan Asset Management's UK Institutional team, said: "There is an interesting discrepancy in the research over what trustees feel their members actually need and what is currently on offer. This could perhaps be explained by the majority of schemes only offering a traditional equity based default option. Basic global equity funds were typically chosen when these DC plans were launched a number of years ago, however, new breeds of funds are becoming available with good track records e.g. total return and diversified growth funds, and trustees are beginning to realise that they could be an ideal default option for DC plans."

"In view of this, trustees now need to look at ways of offering their maturing members a means of diversifying from pure exposure to equities and the volatility over the longer term that this can bring. Whilst diversified growth funds, which typically hold a mix of assets including private equity, funds of hedge funds, and real assets, are still in their youth, it seems inevitable that they will grow into the ‘next generation' default funds."

Perhaps reflecting their lack of confidence in the default schemes, a significant number of trustees have reviewed their scheme recently. Eighty eight per cent of respondents indicated that they had conducted a review in the last three years, with 51 per cent having conducted a review in the last 12 months.

Trustees feeling the pressure

Another key theme to emerge from the survey is the increasing pressure trustees feel themselves under. An overwhelming 81 per cent of those questioned said they feared that members would blame them if their retirement income fails to match their expectations. Yet over 50 per cent of those questioned believe that only a few members have a good understanding of what their retirement income is actually likely to be.

Simon Chinnery, continued: "This research has revealed a potential conflict of investment interest for DC scheme members: the need to achieve good returns set against the desire to maintain their ‘pot' of assets. Traditionally we have seen DC funds take a ‘symmetrical' view of risk - high reward requires high risk, whilst low risk will only provide low returns. However, over the long term pure exposure to equities may provide the required levels of return, but with volatility which we believe few DC trustees are comfortable with."

Trustees call for more information

With 45 per cent of respondents believing that it is their responsibility to ensure that members are educated fully in order that they are able to make informed decisions about their fund choices, the survey also signalled a call for greater support. While trustees have generally received regular training (80 per cent say they have received specific DC training in the last 12 months) there is some disappointment in the amount and quality of information available from their investment managers. Thirty four per cent of respondents were either unsure or accepted that their schemes did not offer enough information to members about the available investment options.

The education theme continued throughout with 49 per cent of respondents identifying that increased education for members would be the change most likely to benefit members, whilst only 40 per cent believe that increased contribution rates would benefit them most.

When asked what steps would be most effective in increasing take up of their DC plans, respondents replied overwhelmingly that the initiation of auto-enrolment would be most effective.

Simon Chinnery concluded: "With all of the increased pressures on today's trustees, increasing education and information is an area that the asset management industry needs to take on board. Improving the frequency and flow of information and education on DC products and services will not only help trustees to better serve their scheme's members, but also explain and encourage the implementation of lifecycle and diversified funds into their default options."

Bob Campion Editor of Engaged Investor, said "It is clear from our survey that trustees are worried that too many members invest in a default fund that may not best for their needs: more sophisticated default funds offer a sensible solution to a widespread problem."