NAPF Investment Conference 2014: The John Lewis Partnership's DC scheme will not consider offering income guarantees to its members, unless a legislative framework is put in place to deliver them.
If schemes want to provide members with guarantees on retirement income, politicians must “hard-code” it into the structure of how they are delivered, the scheme’s head of trustee services Martin Mannion told delegates at the National Association of Pension Funds’ 2014 investment conference last week.
“We, in our personal opinion, have no ability to make use of guarantees in designing DC,” he said, unless there is political change, with easements and capital adequacy.
“One of the issues we’ve had over the years with grappling with DC design is that we’re trying to take [defined benefit] and replicate it, and you can’t in terms of replacement ratios,” said Mannion. Schemes should probably look at more realistic outcomes rather than “heroic” replacement ratios, he added.
In January, the John Lewis Partnership, which owns John Lewis and Waitrose, announced plans to switch its final salary scheme to a hybrid scheme, offering members a reduced accrual rate for future service and a five-year rather than three-year wait before staff can join.
The cost of offering guarantees to members in a DC scheme is prohibitive, said Mark Jaffray, partner at consultancy Hymans Robertson.
“Spending money on better engagement and interventions at the right time is probably a better use of budget than spending money on guarantees for members,” Jaffray added.
Sophisticated investment
Mannion said that since members in a DC scheme usually invest in the default, schemes should not offer products that are wildly different.
“I’m always reluctant when running a scheme to give an option to a member that you can’t then, when it goes wrong, tell them why it goes wrong and [have] it sound sensible,” Mannion said.
“We see things that are conditional guarantees and suchlike, and one of the problems is that they’re modelled, and so when they do fail they probably fail spectacularly,” he added.
Schemes should rely on more measured risk controls as well as taking conventional investments and placing more discipline around them, “rather than trying to rent someone else’s balance sheet to take the downside”, Mannion said.
