Achieving better outcomes – where should the burden lie?

That figure represents more than three times the current average level of pension savings. For the vast majority of us, 15 per cent of income – even accounting for employer contributions – is a far larger tranche of earnings than we can afford.

That’s the problem with interventions such as the IRRI: they place too much of a burden on the shoulders of savers

And that’s the problem with interventions such as the IRRI: they place too much of a burden on the shoulders of savers. The onus should lie mainly with trustees and insurers, who must do everything in their power to deliver the best expected investment returns, net of fees.

Cost v value for money

The key is selecting a default strategy that will provide good outcomes after fees. Trustees and providers must therefore ensure they make better investments on their clients’ behalf. Here, there’s a clear distinction between cost and value for money.

If cost is the sole focus, schemes may well overlook the value inherent in products that are higher priced but could be expected to deliver better overall outcomes. To achieve these, they may have to consider reducing overheads such as communication and administration costs to enable a higher investment budget – and, potentially, better returns for their members.

Meanwhile, investment managers need to ensure that their offerings match schemes’ requirements. They should offer both value for money and the prospect of better investment outcomes. They must also show how they plan to navigate increasingly uncertain investment waters.

Target date funds

One route to achieving better outcomes for pension scheme members is through the use of multi-asset default strategies such as target date funds, rather than traditional lifestyle strategies.

Unlike lifestyle strategies, which follow a fixed path to retirement, TDFs are actively managed – allowing them to respond tactically to the demands of a changing investment environment.

They also have lower and more transparent switching costs and greater flexibility. This facilitates a dynamic response as retirement plans change and the investment outlook evolves.

But while TDFs provide a better framework for implementing scheme investments, the challenge for asset managers goes far beyond this.

In the benign investment environment of recent years, most passive products have delivered substantial returns for investors and managers have not had to work too hard.

Now, however, with uncertainty mounting over the health of the global economy and the effectiveness of global monetary policy, only those with a wider range of tools at their disposal will be able to achieve good investment returns. The challenge for schemes is whether they can budget sufficiently to access them.

None of this is to say that the IRRI’s conclusion is wrong, as far as it goes. It is obviously desirable to invest more in future pension incomes.

But even for employees and employers who can afford the IRRI’s 15 per cent, there is little point in scrimping and saving if those savings are then invested inefficiently.  

David Hutchins is head of pension strategies at asset manager AB