Current Issues in Pensions, 30 April 2013: Improving the DC experience for a typical scheme member, presented by Marcus Mollan, L & G

First, Marcus considered the typical DC member choices:

• 90% follow the “default” investment option, even in companies where the employees are financially “savvy”.
• Very few members opt for drawdown at retirement with most purchasing annuities – this has been fairly consistent for the past six years.
• Almost all members opt for a non-increasing annuity.
• The split of members opting for a single-life benefits vs joint life at retirement is roughly 50/50

So the construction of the default fund is a key factor, given that so many members opt for it.

The natural choice for a default fund is lifestyling. Marcus covered this, along with some facts and figures about diversification, the trade-off between risk & reward and some thoughts on how the portfolio could be constructed.

Marcus also explored the concept of “human capital” – future earnings – acting as a bond-like investment, supporting the argument for holding non-bond assets in the early years. Stability of future earnings is a consideration, however, because earnings may be very volatile for some jobs/industries.

And of course, members’ other pension arrangements are important. Members with existing/prior DB arrangements may be happier to take more risks with their DC choices.

And finally, Marcus considered target date DC funds which are aimed at a specific calendar year of retirement where the investment manager does all the switches. Typically low-risk assets are chosen in the early years though as the fund size at this point is small it makes little difference, but choosing low-risk assets gives a good impression and helps give members confidence in the early years.

Looking forward, as DC is increasingly becoming the norm, we may see a shift in member needs and preferences, particularly at retirement where more members might want to consider drawdown.

From my perspective, not having had direct experience of advising DC schemes, I found this session interesting. It showed me how actuaries could add value, over and above simply saying “put it all into equities then switch to bonds and cash over ten years to retirement”. There’s many other specific factors to take into account depending on the client’s needs and situation and I’d like to see another session exploring this in some more detail.