Author: James Lawrence, Investment Specialist, Mercer
There’s no denying it, in the same way that fad diets can work over the shorter term, simple investment strategies can provide members with strong performance when everything is working to their advantage. But, over the longer term, the result is likely to be the same for both our physical and financial health –a lack of fuel to power us through retirement. We even see every DC pensions article talking about the vital importance of investments, and how this is a key driver of member outcomes in retirement.
This was reinforced in the ongoing investigation of the market for investment consultancy services by the Competition and Markets Authority (CMA) in the UK. In a provisional decision report, the CMA stated that they "encourage policy makers to consider how best to address the lower level of engagement by DC schemes in investment matters". But there’s a disconnect between this and how DC investment strategies are actually being designed.
Rather than the short term objectives which drive the focus on current thinking in DC pensions, there needs to be an increased focus on investments, with a long-term time horizon and a disciplined set of core principles. This will provide members with the fuel they need for a financially healthy retirement. Below, we set out a number of the key reasons why we believe many investment strategies are lacking the nutrition they need for the longer term, and why this needs to change:
Deficiency 1. Low cost = good value
There’s no doubt that the current regulatory environment has a strong focus on cost, from the charge cap to value for money assessments. Low cost is also a key driver when selecting a provider. But there’s a key difference between cost and value that’s being missed by the market, and member outcomes can be compromised through this race to the bottom.
We think the focus should switch to value –pushing hard on fees, but not compromising on selecting the best investments when they can add value for members. An open architecture structure, with transparency on which funds can be used, can help to manage and improve this.
Deficiency 2. A focus on cost means you can't diversify
Evidence and media suggest that the employer/employee relationship has changed – permanently, and so must the approach. Many employees now sell their services to employers for a period of time, before moving on and passing their retirement provision baton to a new employer. Investec research1 suggests millennials will have up to 11 employers during their working lifetime. Only when individuals get to the finish line and retire do they see for sure if each employment leg was run well and whether the baton was passed efficiently to the next employer. But even the pure focus on retirement provision doesn’t tell the whole story.
Download the "Investment Nutrition: The Fuel For Retirement" report to continue reading what we believe are the key reasons why many investment strategies are lacking the nutrition they need for the longer term, and why this needs to change.