The cost obsession is creating a false dichotomy

George Orwell’s Animal Farm used simple slogans and more sophisticated propaganda tools to show how a well-intentioned endeavour to improve the lot of all farm animals could be corrupted as one group sought to impose its will on another.

Some passive funds may be low cost, but who is to say they will deliver the growth vital for an adequate pension?

Comparable conflicts may well arise in retirement provision: who benefits and who pays.

The decline of the welfare state, the commercial need for flexible labour markets and the public’s reluctance to save enough for its own retirement has led to the soft coercion of auto-enrolment to nudge workers into primarily defined contribution schemes and their default funds.

Default funds exist so that no member is required to make an active choice about the investment of their contributions. The choice of this default fund is therefore crucial.

With the current focus so much on costs, often at the expense of investment outcomes, many schemes offer only simple, passively managed defaults.

These can often offer little by way of dynamism or diversification.

Costs are simple and quantifiable. People focus on them because they can. Cost containment may be an easy answer to the complex problem of ensuring adequate retirement, but it is not a simple answer, nor indeed the only answer.

The risk of focusing on what is under our nose is that we might not look further and forget what matters most to future pensioners are good outcomes.

To position cheap index funds against costlier sophisticated funds is to create a false dichotomy.

Value in the DC era

Defined benefit schemes provided generous benefits but these came with generous contribution rates and the risk borne entirely by employers. For DC schemes, combined contribution rates can be much lower, with the risk borne entirely by employees.

The pendulum has swung between two extremes. If people want the benefits once associated with DB schemes then these have to be paid for.

The danger is that ordinary employees remain distrustful and revert to more traditional retirement planning tools like property

As for fairness, is it fair for employers or employees or the state or future generations to shoulder the entire burden of pension provision?

The three main determinants of the size of a person’s pension pot are: the time spent in work; the amount contributed and the investment return achieved. Of these, the latter two are crucial.

Some passive funds may be low cost, but who is to say they will deliver the growth vital for an adequate pension?

And, in an era where central banks have moved from being referees to becoming players, who is to say that the asset allocation of a typical balanced managed fund is best placed to deliver returns in a world of zero interest rates and financial repression?

Given a system that is corralling employees into default funds, such concerns cannot be ignored by trustees or savers.

The Department for Work and Pensions and the Pensions Regulator have recognised this and increasingly cite multi-asset diversified funds as crucial to the success of DC schemes.

Indeed, in an era of high investment volatility and subdued returns, extracting risk-adjusted returns from pensions savings is vital, something that is sometimes in danger of becoming over-looked.

Dynamic and actively managed investment strategies are important tools in helping achieve this.

We must be wary of permitting simplistic platitudes to divert us from thinking more deeply about the serious business of developing adequate, consumer-focused, intergenerationally fair, risk-sharing pension schemes.

Vested interests including the state and large corporations will seek to shape the evolution of pension obligations while persuading the public their lot will be improved.

The danger is that ordinary employees remain distrustful and revert to more traditional retirement planning tools like property, unable to shake off their suspicion that all retirement schemes may be equal, but some are more equal than others.

Charlie Crole is institutional director at Jupiter Asset Management