Beyond belief – investment philospohies in the DC world | AgeWage: Making your money work as hard as you do

Until my friend Mr Yusuf Samad asked me for some comments on them, I had not come across “investment beliefs“. Yusuf had passed me an investment questionnaire from NEST which inter alia asked if I considered there was a difference between a set of investment beliefs and an investment philosophy. I couldn’t see one and said so.

I ended up getting an invite to a discussion that would enlighten me on what investment beliefs were and how they worked for DC schemes.

I turned up at Schroders this morning to find out if I’d answered correctly. No sooner had I engaged with a complimentary cup of tea than I was set upon by a man from NEST complaining that my Mothball NEST till 2017 blog would do little to promote NEST till 2017. I restated my view that between now and 2017 NEST was about as much use as a chocolate teapot and things didn’t make things better.

Fortunately I was saved from the wrath of the uncivil servant by David Hutchings of Alliance Bernstein, a man passionate about improving DC outcomes. David’s been putting his balls upon the block for some time in the hope of getting collective drawdown from target dated funds (see blogs passim).

Yusuf Samad arrived out of breath, apparently he’d been delayed by a woman fighting his bus driver. I was sorry to see him puffed out but glad that like me , he’d arrived by bus. I’m for collectivism in transport too.

Yusuf did his stuff, filled us in on “investment beliefs” and gave some good examples from the USS and the BBC pension trusts. Then he pushed off.

Pauline Skypala hosted a panel discussion. She had the answer to the difference between investment beliefs and an investment philosophy. The sceptical might put it like this;-

Investment Philosophies are what Asset Managers use to justify fees- Investment Beliefs are how trustees justify paying them.

What followed was a litany of DB stuff from the great and the good. This kind of high level investment talk is meat and drink to the senior fund managers and investment consultants, but much as I like the like of John Belgrove and his views, they are not relevent to this stage of DC development.

With the exception of Ray Martin , nobody seemed to keep to topic.

You could see Ray, who has written the book on occupational DC, getting frustrated. He pointed out that DC trustees should be focussed on maximizing DC outcomes;- but his was a lone voice. I got the impression that the investment experts were playing on a different pitch.

Ray’s clearly bought into the line that the smoothed investment path ensures members continued participation while the rocky road of a pure equity based accumulation sees many members jacking in savings.

If this is the case, I’ll sign up to the DGF approach espoused by the DGF managers. However I haven’t seen any empirical evidence to support the hypothesis. Au contraire (Rodney), during my time with Zurich sitting in DC call centers and doing “member education” , I saw scant evidence that people jacked in saving because their funds had gone down (hence my second investment belief -below). People jacked in saving when they were skint and though they moaned a lot when markets were against them, they persevered.

Most people aren’t as stupid as some people suppose.

I’m going to dig further here and have put out a call on twitter for hard fact on the matter. By “hard” I mean evidence that people actually have voted with their feet and jacked out of their DC pension when the going got tough- not some soft feedback from “focus groups”.

There were plenty of complaints that there was little formal governance for contract based plans (personal pensions). If I hadn’t lost the will to put up my hand I would have pointed out that personal pensions were invented in the discredited belief that people could do their own governance. The retrofitting of default funds can’t paper over the cracks. Personal pensions are mutton dressed as lamb.

As I understand it, the point of NEST and the Investment Management Association, getting together was to see whether the idea of investment beliefs could be transferred to a DC world.

As we got nowhere near getting an answer on the day, here are my six beliefs which may not be to the taste of the fund managers, investment consultants but might resonate to one or two who know a little about defined contribution pensions.

1. The business of DC fiduciaries is to maximise the retirement income of those they care for.

2. Volatility of account values is acceptable prior to the start of the lifestyle glide path.

3. Any fees paid in excess of the beta price need to be justified in terms of excess returns achieved (and should be reviewed in that light).

4. Fiduciaries are obliged to understand the intentions of members with regards to the timing and nature of decumulation.

5. Fiduciaries should look to work along collective lines wherever possible and seek to extend collectivism into the decumulation phase.

6. Members should be aware of the DC investment beliefs of their fiduciaries and should be able to override them when they wish to exercise their personal beliefs.

As various NEST officials appear to read these blogs let me be clear. I have nothing against NEST’s long-term aspirations but until it is allowed to take and give transfers, members will only have limited scope to exercise their beliefs.

NEST has provided a fallacious justification for removing volatility (at the cost of returns) for those in the opening years of saving.

NEST has shown no interest in exploring opportunities for collective decumulation and judged by their continued reckless spending, they seem to have little regard to the long-term outcomes of their members (who are now obliged to pay off the debts currently being incurred).

I have recommended NEST to several of my clients as one of a number of mastertrusts, for the most part, clients are putting off a decision till they can fully understand the other new entrants to the market (NOW, B &CE et al). I suspect when they have the opportunity to make an informed choice – they will not be chosing NEST.

According to my investment beliefs – NEST as it is, makes little sense to me!

Between now and 2017, NEST looks hamstrung by the ABI forged manacles on contributions and transfers. The longer it continues to market its sub-standard self, the greater the debt it incurs.

My argument that NEST should pull in its horns and wait makes perfect sense, most especially if it brings to the public’s attention the extent of the debt already incurred. If it forces the Government’s hand and allows “our NEST pension” to compete with other mastertrusts (and GPPs) on a level playing field, well and good.

As for investment beliefs, they clearly are needed, but they need to be linked to the outcomes of DC pensions. Until we have got over the messages about how fees and poor “At Retirement” decision making destroy retirement income, nuances such as the deplayment of socially responsible investment strategies , the avoidance of unwanted risks and the benefits of genuine diversification- take second place.

I’m glad I took a morning out to get this straight in my head. I suggest anyone involved in advising DC fiduciaries or beneficiaries does the same.