DC benchmarks expected to switch attention to performance

Last month, index provider FTSE announced a series of UK DC benchmarks allowing pension schemes to measure the performance of the glidepath strategies used to guide people into retirement.

[The index] will make governance committees’ jobs so much easier in terms of evaluation

Tim Banks, AllianceBernstein

With auto-enrolment anticipated to bring around 9m new savers into pensions – with the majority entering DC schemes – governance and member outcomes have become a regulatory focus for the Pensions Regulator and the Financial Conduct Authority. 

The FTSE DC benchmarks can be used for target date and lifestyle approaches, and group savers into cohorts depending on their expected retirement date. 

At a roundtable discussion held at the London Stock Exchange last week to launch the index, Mel Duffield, deputy director at research and education charity the Pensions Policy Institute, said the benchmarks could help address a governance gap in assessing default fund performance. 

“There’s obviously been a huge focus and scrutiny around charges and the governance around that, and a lot less focus on the other side of the coin, which is investment performance,” she said. “It’ll be interesting to see if the government takes a stronger focus now it’s got the tools to do so.” 

The benchmark compares a default fund’s performance net of fees and so can assess whether and how much value has been added. 

Duncan Buchanan, president of the Society of Pension Professionals – whose members comprise a range of service providers including consultants, independent trustees and administrators – said the index will be “extremely helpful” to trustees and advisers when monitoring performance. 

He added: “No doubt the range of indices will develop over time as new default investment strategies are developed in response to the freedom and choice Budget changes.” 

Henry Cobbe, managing director at Elston Consulting, which worked with FTSE to develop the index, said the tool will help move the focus from cost towards value for money and member outcomes. 

He said: “If the 30 basis-point [strategy] has done dreadfully, and the 75bp one has done really well on a risk-adjusted basis by cohort, then which one would you rather be in? Which one would trustees be glad they chose?” 

Cobbe said the regulator is “very interested” in the strategy, adding: “This powers their governance agenda.” 

Robust and objective

The FTSE’s standard index looks at global equity allocations up to a maximum of 60 per cent, 80 per cent or 100 per cent and assumes a 20-year transition from equities to UK index-linked gilts, with the target retirement dates at five-year intervals. Additional custom benchmarks are also available. 

The equities are benchmarked against the FTSE All World Index and not weighted towards the UK, which Andy Cheseldine, partner at consultancy LCP, said was important to avoid a home bias. During the roundtable discussion, he cited the US and Australia as being heavily self-invested and “pulling itself up by its own bootstraps”. 

He said: “Taking out some of that bias is really important because it’s a global market now anyway and lots of UK companies have overseas earnings as well. It just takes away some of the biases that we’d otherwise have.” 

Cheseldine added: “Over time, I think consultants will get their heads around it, and therefore help trustees get their heads around it.” 

Tim Banks, managing director of sales and client relations for UK and Ireland at target date fund provider AllianceBernstein, also speaking at the roundtable, said up to now the focus had been on the underlying components of default funds rather than on the overall strategy from the perspective of different member cohorts. 

He added: “[The index] will make governance committees’ jobs so much easier in terms of that evaluation.”