Optimising Investment Options DC Members Alex Kinsella - Allied Pension Trustees IAPF Annual Investment Conference 1
Agenda Pension Landscape • Redefining DC • DC Scheme foundations • Destructive T endencies • IAPF Annual Investment Conference 2
PENSIONS TIMEBOMB IS HERE ALREADY Who is goin ing to pay fo for r it it all? ll? ⅔ of workforce has either no pension or is • unfunded. 12% of the workforce are in chronically • underfunded PRSAs. 1.983m 6% of the workforce are in 775 DB schemes, • many are winding up & many are closed to future accruals. 14% of the workforce are in DC schemes with • an average contribution of just 11.1%. IAPF Annual Investment Conference 3
DC PENSION CRISIS IS WORSENING Q . What at's th the e pr probl blem? em? A. Quite simply - insufficient funds to provide an adequate retirement 1.983m income Lack of adequacy (contribution • levels) Focussing on the wrong things • (inputs not on outcomes) IAPF Annual Investment Conference 4
A SIMPLE DC MEMBER CHECKLIST 1. SET A TARGET 2. DECIDE HOW MUCH TO CONTRIBUTE 3. DECIDE WHERE TO INVEST IT 4. RETIRE HAPPILY & COMFORTABLY IAPF Annual Investment Conference 5
ITS TIME FOR DEFINED CONTRIBUTION TO BE REDEFINED TARGETING RETIREMENT INCOME IAPF Annual Investment Conference 6
Define your outcome not your Contribution 1. Get your scheme foundations right 2. Understand Trustee biases 3. Understand Member biases A A WELL LL-DESIGNED ED P PLAN AN BEGIN INS W S WIT ITH THE OUTCOME IAPF Annual Investment Conference 7
Solid Scheme Foundations Efficient and Protection of effective assets administration Appropriate Value for investment money decisions Factors required to Appropriate Appropriate contribution help achieve a decumulation level decisions good outcome in retirement Source: UK Pension regulator 2011 paper - Enabling good member outcomes in work-based pension provision IAPF Annual Investment Conference 8
Destructive tendencies of DC Trustees Loss of control Lack of Independence from Consultants Manic to Panic Focus on Cost not Value for Money Buying High Selling low END RESULT: Focus on Risk Control Inadequate Naïve Diversification What happened to Assets at Returns? Ineffective asset allocation Retirement IAPF Annual Investment Conference 9
DON’T GIVE UP YOUR INDEPENDENCE Developi ping g trend t towa wards T Trus ustees implementing f fiduciary management / / delegated c consulting. Why hy wo woul uld y you d u do i it? 1. Time constraints 2. Improve the efficiency of decision-making 3. Cheaper than maintaining direct relationships with A rated fund managers Wh Why you s u sho houldn’t! 1. 1. Cost st - Extra layer of scrutiny is required to monitor the fiduciary manager. 2. 2. Control - Only 10% of Independent trustees surveyed recently in UK believe that fiduciary managers are best placed to deliver investment advice aligned to the interest of the scheme 3. 3. Conflicts – Revenue generation/impartial advice/confining advice to strategies and funds within delegated framework/delaying information to non delegated clients Hymans & Robertson Independent trustee Survey 2015 Delegating d doesn’t r remove wo work a and nd risk; i it simply c cha hanges i its na natur ure REMEMB EMBER ER - Fiduciar ary resp sponsibility r rema mains s with t h the he trust ustees. IAPF Annual Investment Conference 10
DON’T GIVE UP YOUR INDEPENDENCE Which type of business is best placed to deliver investment advice aligned to trustee interests 9% 4% 87% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Independent Investment Fiduciary / Delegated Service Asset Managers Consultants Providers Hymans & Robertson UK Independent trustee Survey 2015 IAPF Annual Investment Conference 11
Destructive tendencies of DC Members Overconfidence Excessive Risk Taking Hyperbolic Mental Accounting Discounting Pension formulae Short term actions are Matter inconsistent with long term goals END RESULT: Procrastination & Loss Aversion Inadequate Inertia losses loom larger than Assets at Non-enrolment & gains (Kahneman & Tversky, 1979) Infrequent rebalancing Retirement IAPF Annual Investment Conference 12
T esting Loss Aversion in the IAPF! Q (problem f fir irst posed b by Paul ul S Samue uelson in in 1963) 1963) IAPF Annual Investment Conference 13
Key ey poi oints t s to o con onsid sider er Understand your members’ DC scheme reliance for their retirement (greater • reliance usually translates to a greater need for less risk exposure) Match the decumulation strategy for the largest cohort of the scheme • Consider risk tolerances of different cohorts with different decumulation strategies • ARF (Cautious/Balanced/Adventurous) o Annuity (Cautious/Balance/Adventurous) o Cash drawdown (Cautious/Balance/Adventurous) o Measure risk at a strategy level not individual fund level • Encourage adequacy through education, scheme design and benefit packages • IAPF Annual Investment Conference 14
IAPF Annual Investment Conference 15
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