Retire

There’s no denying it, in the same way fad diets work over the shorter term, simple investment strategies can also provide strong performance when everything works 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. Ongoing investigations of the market for investment consultancy services by the Competition and Markets Authority (CMA) in the UK reinforce this point of view. In a provisional decision report, the CMA stated that they "encourage policymakers to consider how best to address the lower level of engagement by Defined Contributions (DC) schemes in investment matters." But there’s a disconnect between this and the design of DC investment strategies. Changing Relationship Between Employer and Employee 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 criteria will provide members with the fuel they need for a financially healthy retirement. Below are three key reasons 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. This race to the bottom is compromising member outcomes. Instead, the focus should switch to value – pushing hard on fees, but not compromising on selecting the best investments when they add value for members. An open architecture structure, with transparency on which funds can be used, can help to manage and improve this selection process. Deficiency #2: A Focus on Cost Means Lack of Diversification Diversification is said to be “the only free lunch in investments,” but we see a number of investment strategies in the market lacking the balanced nutrition to provide members with a healthy pot at retirement. Whilst we’ve had a market environment over the past 10 years that has broadly been favourable for simple, undiversified strategies, the future is uncertain, with political risk across the globe, uncertainty around the impact of climate change, and DC members who are struggling to save enough for retirement. There’s a misconception that focusing on cost means you have to invest only in the traditional asset classes – equities and bonds. Not only does this leave members exposed, it also isn’t true. There are a number of more innovative asset classes that tick the box of being both cost-effective and strong diversifiers – emerging markets, infrastructure and property (on a listed basis) to name a few. On top of this, we believe that set-and-forget long term allocations are leaving money on the table. When you have the right expertise and depth, using a dynamic asset allocation process, adjusting for short to medium term market views, can and does add value by positioning portfolios for all market conditions. Deficiency #3: Members Move Around – Why Should I Care? Members will be invested for upwards of 40 years, but on average members will spend 8.6 years at each employer1. So you can see why employers are reticent to spend time, and money, on designing their investment strategies. But if we all took that view, we’d be failing members. Over the next 20 years, average DC pot sizes are expected to increase by 91 percent2. In addition, assets under management in the DC workplace pension market are expected to increase to c. £1.7trn in 20302. Whilst many members may be relying on other sources of income currently, this isn’t going to be the case in the near future, and the shift from DB to DC pensions means more people will be increasingly reliant on their DC pot to fund their retirement. Most people realise the importance of healthy eating and a balanced diet on their long term health, but often we don’t think they give the same care to investing for retirement. There are a number of reasons and key drivers for this –but these will need to be overcome for us all to have healthy retirements. While investment strategies which fall victim to these deficiencies will falter, and fads will run out of steam, an investment solution based on solid, grounded principles will stand the test of time. Choosing a DC pensions solution that has this at its core is critical. All parties will have a role in this, from members to trustees, pension providers to regulators, and we all need to take action to make sure investments are given the focus they deserve. Download the Investment Nutrition: The Fuel For Retirement report to continue reading what we believe are the key reasons many investment strategies are lacking the nutrition they need for the longer term, and why it’s critical to implement change now.  You can also visit UK.mercer.com to learn more.   1 Oecd -https://stats.oecd.org/Index.aspx?DataSetCode=TENURE_AVE 2 FCA - Retirement Outcomes Review.https://www.fca.org.uk/publication/market-studies/retirement-outcomes-review-interim-report.pdf

James Lawrence | 20 Dec 2018
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