Do default investment strategies align with members' needs?

What you need to know

This Pensions Policy Institute (PPI) Briefing Note 108, sponsored by AllianceBernstein, evaluates the alignment of DC default investment strategies with members' needs, and the most appropriate assessment for delivering value for money.

Executive Summary

The vast majority, typically 95% plus, of members of defined contribution pension arrangements entrust the investment of their savings to the so called "default strategy".

The pensions industry does little to promote the considerable benefits members enjoy from their savings being collectively pooled into a professionally managed and independently overseen investment strategy aligned to their needs.

Managers of default strategies can:

• Use scale to keep costs down,
• Their in-depth knowledge of pensions and investment markets to efficiently evolve the strategy in an everchanging world and;
• Their experience of managing investments to avoid the financially crippling behaviour that often afflicts most amateur self-directed investors of buying high and selling low.

This report addresses the critical issue of how the objectives for these strategies are set, and reviewed through time, in a manner which best aligns with the substantial number of savers that rely on them. It also highlights the importance of setting these objectives has in both how the money within it will be invested and ultimately therefore the investment returns it delivers.

We at AB are supportive of the conclusions of the report and call for:

1. Common understanding of the language and governance process surrounding the strategy to improve the quality of dialogue
2. Clear disclosure of performance of the strategy versus investible benchmarks, ensuring accountability exists for those managing the strategy
3. Transparency on the costs of strategy alone which will support pension customers, members and employers, in independently assessing its value for money
4. Quantification of potential conflicts of interests with costs incurred directly by the provider or distributor and related commercial interests clearly disclosed to ensure they are managed in members bests interests
5. The process for setting the objectives of the strategy must ensure its alignment with as many members as possible as well as identifying those for whom it may be a bad fit
6. Independence of oversight between those setting the objectives and reviewing performance and those making investment decisions is an essential part of good governance