An encouraging tale of choice

choiceIt was not long ago that we measured the value of a DC investment proposition by the number of funds available to members. The race to 500 saw organisations such as Skandia producing lists of fund links that paralysed savers into inertia. This was fine for the “trusted adviser” who could prove value through complex reports that flattered the comprehension of the recipients.

These “fund universes” now sit like decommissioned aircraft in the Arizona desert, a thing of awe and wonder but as useful as a chocolate teapot.l

It was against this background of ungoverned choice that NOW pensions presented its monofund, a single investment choice that represented its “best idea” for DC savers in the UK. NOW created a second pole as far removed from “self-selection” as you could get. But the debate is not binary, there are plenty of alternative “fund sets” (as the proposition managers like to call them).

The organisation of funds from default down , has generally been thought of in terms of a pyramid with the default at the apex “core funds” below and a the diaspora of sector and themed funds forming the base. The member journey is thought to start at the top (and generally end there) with members moving down the pyramid  occasionally.

Emma Douglas’ woodland analogy of bunnies, bears and badgers remains the best explanation of the segmentation of investment behaviours with 80% + of savers reckoned to be bunnies and not more than one in twenty devising portfolios from the specialist funds on offer.

The big breakthrough moment was in fact a technology play. When FNZ showed that you could manage an infinite number of retail funds on a platform that might also deliver ISAs and manage sharesave and even private portfolios, they opened a box Pandora would have been proud of.

For the large employer and their advisers, the corporate wrap was a way of managing “wealth at work” and allowed the awkward question of “what comes out at the other end?” to be neatly sidestepped.

For the top twenty per cent of companies and their top twenty percent of staff, the new wrap platforms have proved an excellent advantage. As I wrote a couple of years ago “portals for who, platforms for dough” – large gin and tonics all round.

But for the smaller companies and the less wealthy staff, little was done throughout the first decade of the millenia to progress mass market DC. And while DB schemes closed, the numbers relying on these new workplace DC plans swelled. The addition of the auto enrolled more than doubles the numbers eligible for workplace DC benefits and sooner or later the question of mass market investment solutions was bound to be raised.

First with NEST, then with NOW, the concept of an in-house managed segregated default fund emerged. The debate on how the fund accumulates , runs its glide path and what it converts to is still raging.

But it was a debate that has had positive consequences for the wider constituency of workplace funds. Encouraged by the popular debate (and the prospect of new premium flows) , organisations such as Alliance Bernstein and Dimensional brought to Britain , the concept of targeted funds with objectives based not on some arbitrary performance benchmark, but on the retirement behaviours of the consumer – the member of these funds.

The focus of regulation is shifting to from the FSA’s focus on advisory behaviour to the Pension Regulator’s on “good DC outcomes”.

And for the first time in my memory, I can now advise companies on meaningful choices between one workplace pension scheme and another based on differing investment philosophies. If you were to ask me how NOW and NEST differed from BlueSky and the Pension Trust, I could answer you in terms of differences in their management of the investment default.

In the insured world it is a similar story, I can chose from an array of defaults ranging from Standard Life‘s GARS (effectively a hedge fund) through multi-asset funds to conventional lifestyles that switch from pure equity to bonds.

And whereas the long lists of funds that I was presented with twenty years ago, depressed and bewildered me and my clients, these choices are inspiring. If you go to the Pension Play Pen linked in group, you can see a long debate over whether a fund of hedge funds can outperform a more conventional multi-asset fund. It’s an informed debate that is argued in terms of what the customer will most benefit from.

I feel more enthusiastic about the investment section of the about to be launched than any other.

The investment of our DC monies should be pre-occupying our minds, whether as advisers, fiduciaries or users. If you are reading this blog, I hope I have transmitted some of the excitement that I sense from talking to investment professionals who, at last, seem to be “getting DC” and getting DC choice.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to An encouraging tale of choice

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