Optimising Investment Options DC Members Alex Kinsella - Allied - - PowerPoint PPT Presentation

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Optimising Investment Options DC Members

Alex Kinsella - Allied Pension Trustees

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Agenda

• Pension Landscape
• Redefining DC
• DC Scheme foundations
• Destructive T

endencies

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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.

• 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%.

PENSIONS TIMEBOMB IS HERE ALREADY

1.983m

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• Q. What

at's th the e pr probl blem? em?

• A. Quite simply - insufficient funds to

provide an adequate retirement income

• Lack of adequacy (contribution

levels)

• Focussing on the wrong things

(inputs not on outcomes)

DC PENSION CRISIS IS WORSENING

1.983m

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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 

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ITS TIME FOR DEFINED CONTRIBUTION TO BE REDEFINED

TARGETING RETIREMENT INCOME

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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

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Factors required to help achieve a good outcome in retirement

Appropriate contribution level Appropriate investment decisions Efficient and effective administration Protection of assets Value for money Appropriate decumulation decisions

Solid Scheme Foundations

Source: UK Pension regulator 2011 paper - Enabling good member outcomes in work-based pension provision

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END RESULT: Inadequate Assets at Retirement

Focus on Risk Control

What happened to Returns?

Focus on Cost not Value for Money Loss of control

Lack of Independence from Consultants

Manic to Panic

Buying High Selling low

Naïve Diversification

Ineffective asset allocation

Destructive tendencies of DC Trustees

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DON’T GIVE UP YOUR INDEPENDENCE

Hymans & Robertson Independent trustee Survey 2015

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 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.

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DON’T GIVE UP YOUR INDEPENDENCE

87% 9% 4% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Independent Investment Consultants Fiduciary / Delegated Service Providers Asset Managers

Which type of business is best placed to deliver investment advice aligned to trustee interests

Hymans & Robertson UK Independent trustee Survey 2015

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END RESULT: Inadequate Assets at Retirement

Procrastination & Inertia

Non-enrolment & Infrequent rebalancing

Mental Accounting Pension formulae Matter Overconfidence

Excessive Risk Taking

Hyperbolic Discounting

Short term actions are inconsistent with long term goals

Loss Aversion

losses loom larger than gains (Kahneman & Tversky, 1979)

Destructive tendencies of DC Members

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T esting Loss Aversion in the IAPF!

Q

(problem f fir irst posed b by Paul ul S Samue uelson in in 1963) 1963)

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• 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)
• Annuity (Cautious/Balance/Adventurous)
• Cash drawdown (Cautious/Balance/Adventurous)
• Measure risk at a strategy level not individual fund level
• Encourage adequacy through education, scheme design and benefit packages

Key ey poi

• ints t

s to

• con
• nsid

sider er

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