DC: What are the investment options and challenges for investors?

With the Defined Contribution market gaining momentum CAMRADATA’s new whitepaper investigates investment options and challenges for investors…

CAMRADATA has published a new whitepaper entitled, ‘A Universal Solution for the Individual’, which examines trends in Defined Contribution (DC) assets, and shares insight from investment managers and pension managers who attended a recent Defined Contribution roundtable.

The roundtable participants included, Capital Group, Newton Investment Management, Barnett Waddingham, Nuclear Decommissioning Authority, LCP, Punter Southall Aspire and River and Mercantile Solutions.

The panel began by acknowledging that almost all the money people save in modern workplace pension schemes ends up in defined contribution schemes.

Given this weight of savings, the panel debated whether Environmental, Social and Governance (ESG) considerations should be baked into the default option, as well as the distinction between ethical and ESG factors.

The panel then considered fees and costs, and the opening up the DC investment landscape. Finally, the panel discussed why pension scheme funds and adopters are behind the curve when it comes to adopting technology.

Sean Thompson, Managing Director, CAMRADATA said, “We now have 15 million people invested in DC schemes, totalling around £400 billion and the DC market is continuing to gain momentum and focus.  There are a variety of DC options available to the investor, but employers must decide which one would be most suitable for their employees.

“In addition, as the interest in environmental, social and governance (ESG) factors swells globally, there is more of a requirement for a variety of options across investments, vehicles and outcomes. This provides both challenges and opportunities across the market in terms of innovation, education and distribution.

“Our roundtable investigated the options for investors, the diversity amongst providers and how this should be adapted across schemes and individuals, as well as the current challenges and opportunities surrounding how the market will look in the future.”

Key takeaway points were:

  • Steve Hayton, group pensions manager, Nuclear Decommissioning Authority (NDA) said that that around 75% of DC assets were housed in the scheme default fund and Elizabeth Garner, head of pensions and investments at charity, Save The Children, said more than 90% of its members’ total DC savings were in the default.
  • ESG integration means including ESG considerations in all aspects of capital management, not merely offering it as an option on the side. Jin Philips, head of strategic relationships, EMEA, at Newton Investment Management said schemes can and should evaluate asset managers on ESG integration and that this should be done on an ongoing basis.
  • Fees and costs are influential in the UK market ever since the government introduced a 75bps cap on default fund costs, however, the panel advised people should not see cheap as best or good value.
  • Fresh thinking is needed on how trustees might get the kind of risk-return pay-off they need for the years ahead. One option the government is considering is how to open up illiquid investments (such as real estate and infrastructure, privately traded debt and equity) to DC plans.
  • Opening up the DC investment landscape means that pension schemes are becoming more aware of the risk-return profiles of all types of investment strategy

Thompson adds, “The discussion ended by looking at what was holding up the DC market. The slowness of financial services in the UK to embrace technology was considered one of the main barriers.  Progress made has been thanks to the ambition of the tech companies rather than incumbent banks and insurers. Pension funds and administrators are even further behind. Despite the trillions of pounds saved specifically for retirement, there are no popular pensions apps.

“The panel was left with a final thought. Half the UK workforce could be self-employed by 2050 so it’s imperative for the DC pensions industry to be more mobile, as a greater proportion of the population becomes aware that they have one or more pension pots. They will be searching for them online and ideally from their mobile device, so pension providers need to embrace technology.”