It’s high time for schemes to rethink their default design

David Bint, investment director, Standard Life Investments

David Bint, investment director, Standard Life Investments

In an industry characterised by its need for stability, as well as its requirement to remain in-line with legislative changes, it is important at times to consider the bigger issues of how defined contribution schemes are structured and how providers can best service members’ needs.

It was with this in mind that Standard Life Investments has sparked discussion on the subject of the design of default investment options for DC schemes, as well as asking whether individual members could be provided with a more tailored offering.

“Taking the first point, traditionally, prior to pensions freedom, members followed a typical glide path and 10 years before retirement the portfolio would be de-risked, primarily by moving into bonds and also considering the tax-free cash most people would look to take at the point of retirement,” explains investment director David Bint.

“Now, people could have taken the cashfree cash at age 55 and still have 10 years to retirement. We then need to question whether it is desirable to de-risk the portfolio in the same way and move a substantial amount into cash, thereby reducing the return potential for the portfolio.”

Mr Bint points to sequencing risk, highlighting that the savings’ outcome for a member targeting a given level of investment return could be very different depending on the path of returns over the savings cycle.

“It is preferable to have stronger returns in the second half of the journey when the pot is expected to be bigger than at the start when you have only just started putting money in,” he says. “With that in mind, allocating to cash in the years prior to retirement means reducing the return potential just when it’s needed the most. “A potential solution would be to maintain a more diverse range of holdings, including to riskier assets, while making less of a move to cash over time.”

This leads on to the thorny topic of whether individuals are best served by schemes that are designed around the “average” member. Mr Bint questions whether this “average” person exists when you take into consideration the myriad risk appetites and outcome requirements of each member. He is, however, mindful of the complexity and potential pitfalls of offering more tailored schemes.

He says: “While it may be desirable to offer a more personalised approach, it raises the issue of the level of engagement you have with members. If you only have the person’s name, age and location it is difficult to establish their requirements. However, if you begin trying to gather more information there is the risk that you begin moving into the area of ‘offering advice’.”

“While it may be desirable to better match the members’ portfolios with their requirements there is the overriding danger that, while for many you might make an improvement on the outcome of the portfolio, there will be some for whom you will get it wrong.”

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.

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