DC defaults – five times better than you think!


In yesterday’s blog I wrote about the advances that have been made in DC defaults , making them an attractive place to put your money whether you are a novice saver or a professional investor.

In this blog – which is based on a brilliant presentation by Emma Douglas and John Roe, I explore how workplace pensions can adapt to the increasing demands of savers for value for their money.

I’ll do by busting five myths I hear from time to time, from people who think workplace pensions are  investments’ poor relations.

In summary

  1. Workplace pension defaults are just equity trackers
  2. Alternative diversifiers  aren’t liquid enough for workplace pensions
  3. Workplace pensions can’t afford diversifiers within the charge cap
  4. Diversification only matters for those close to retirement
  5. Workplace pensions can’t help people get a retirement plan


Myth one – Workplace pension defaults are just equity index trackers.

There’s a lot of talk about the need to introduce alternatives into DC, as though it’s not currently happening.

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How DC funds can diversify

This chart shows how that Legal and General incorporate alternatives and alternative credit into the MAF and have been doing from its launch back in 2012

The point of this chart, which was presented by LGIM’s John Roe at #PLSA19 and shows that his DC default (LGIM MAF) allocates more like the Pension Protection Fund. While implementation of the strategy may be different , ordinary savers are getting sophisticated institutional investments within a pension wrapper for a maximum of half a percent pa.

If you are interested in the detail of the asset allocation, you can find out more from its Factsheet here.

Myth two – alternatives aren’t liquid enough for daily pricing

LGIM don’t buy all their alternative assets directly, but also use listed alternatives. Martin Dietz, another LGIM fund manager explains.

“we believe listed alternatives are a straightforward implementation vehicle. Liquidity is achieved for investors because they can buy and sell their shares in these vehicles to other investors at any point in time. And as this trading doesn’t change the number of shares or the capital available to the listed structure, it doesn’t need to meet daily redemption requests and is able to own the less-liquid underlying assets.

Equally, listed alternatives can overcome the challenge of underlying assets that are not priced on a daily basis: their real asset price is part of the listed alternative’s balance sheet and is reflected in the calculation of its net asset value. But there is also a daily share price for the listed vehicle that investors can trade on, and this will directly reflect current market conditions”.

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Myth three – you can’t afford these diversifying assets within the charge cap.

There’s no doubt that buying these diversifying assets costs the pension provider more, and if they cannot increase their price to member or policyholders, then that means a lower margin on money.

But investing to obtain the predictable benefits of diversification should be an easy decision for anyone willing to spend more than the bare minimum for a better outcome.

After all, the value-for-money case for upgrading an old-fashioned balanced portfolio of equities and bonds should be straightforward when the extra cost for genuine diversification through alternatives can be achieved from as little as 5-10 basis points (0.05% to 0.10%).

How this works through to L&G’s workplace DC default

John Roe tells me

It’s essential we remain innovative and evolve our DC solutions. Our clients and their advisors rely on that. We’ve introduced a range of new building blocks over time.

You can see this in this illustration

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LGIM has added 5 new building blocks, as well as evolving the weights of existing building blocks if their risk-return properties evolve and that changes their relative merits – including shortening UK index-linked Gilts twice and altering exposure due to the risks around Brexit in 2018-2019.

It has done this without putting up its price.

Myth four – Diversification only matters for those close to retirement

Younger investors in default funds strategies are often investing more in equitiesIn higher risk portfolios there are fewer opportunities to diversify by asset class, as many assets carry too little risk (and so long-term return opportunity) for inclusion

So there’s merit in looking for other ways to diversify return sources within equities – such as factors that the manager believes are diversifying and may give extra  long term return.

I choose to invest in FutureWorld which is one of the equity funds LGIM run that uses factors the managers think will boost performance (and makes for happy millennials).

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I am (in spirit) a millennial and am getting a fund that factors sustainability of investments into its strategy.

The  Pathway Funds which are the default of the L&G Master Trust , use different factors.


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And investors aren’t restricted by geographies, getting access to emerging markets as well as the ones we know better, while introducing factors also generally reduces such large weights to the very biggest companies; Apple and Microsoft have a higher weight in market cap equities than all stocks from Germany for example.

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Myth five – workplace pensions can’t help people get a retirement plan

One of my recent themes on this blog is that most people have pension pots but few have retirement plans.

The workplace pension providers have a huge amount of data on what people actually do in retirement. Here is what they’ve found out

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It’s not easy to plan around people’s uncertainty – especially when theres such diversity of uncertainty!

When you are guessing – everything is a trade-off but the data firms like L&G is collecting is important not just to them, but to advisers. At AgeWage we feel priviledged to be able to share  this data.

LGIM has found that not only is there a wide dispersion of what people intend to do, there’s a wide dispersion of what they do – when it comes to leaving work. And there’s little correlation between people stopping work and people taking their retirement savings,

Just look at that dark green bar at 55!

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So what is going on when people do take their money


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But – as we know from FCA numbers – the more money you’ve got, the more likely you are to convert from pot to some form of AgeWage.

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We know these trends but it’s great to see more data backing this up and it’s great to see an insurer making use of the data , as this article suggests.

Getting more for your money

L&G are using the work of LGIM to provide people with more for their money.

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You get an awful lot of value from a Workplace Default fund and most of the value is in the investment strategy.

Our AgeWage numbers suggest that people using workplace defaults – like LGIMs are doing better than if they try doing it themselves.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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