Dispatches from the NAPF conference in Edinburgh: Asset manager and academic argue that charge caps stifle innovation and don’t give employers enough choice

No, it isn’t a dream – Simon Chinnery actually is standing on stage at the NAPF Investment Conference trying to lead a chant of “Pensions good and DC rocks”.

Surreal though it may be, it’s encouraging to see such lively commitment to the DC cause. This is how he has chosen to end his response to the question: “Does cheap mean low quality?” He began it with a single word – “yes”.

He is frustrated at the preoccupation with cost and says there is a risk of knowing the price of everything and the value of nothing. It is hardly surprising that this is his stance, but it is clear that the industry will have to be creative to deal with the significant problem posed by inadequate DC provision.

“There will be great disparity as people retire on DC,” says Chinnery. “That is why income replacement is critical”.

Investments should be designed around income replacement

In his view, investments should be designed around income replacement, rather than the much vaunted member outcomes.

“Diversification is key,” he says, because it gives a better risk adjusted return, and there is evidence from the US to suggest that it can help mitigate cashflow volatility as contributions go up and down with changing member circumstances.

He warned that he could see potential litigation when people asked why they were in a disadvantaged position

He vouched for dynamic multi asset allocation, but also said the industry needed to “think bigger” because “cheap, cheap, cheap” will not do it. He warned that he could see potential litigation when people got to retirement and asked why they were in a disadvantaged position, only to be told their employer had “got the cheapest”.

James Churcher of Abbott Laboratories broadly agrees that the industry has “been much more creative with DB, and should be with DC” and fears a cap could stifle innovation.

They may be willing to pay more for what they perceive to be valuable

People need to know what they are getting for their money, because they may be willing to pay more for what they perceive to be valuable.

Churcher likened this to forcing all employers with office canteens to insist on buying economy priced baked beans rather than giving staff the option to pay more for better quality beans.

He also pushed for DC schemes to make more use of absolute return funds instead of “volatile trackers” because savers will get scared when they see markets drop and their returns go with them.

The gravity of the DC conundrum should not be underestimated. As Chinnery says, “you only get one shot at being able to retire, and (the industry needs) to get as many members as possible over the finish line”.