Articles - How good can DC get?

Mark Fawcett, NEST chief investment officer
It should be no surprise to you that over the next few years millions of people will be enrolled into workplace schemes. It may well be a surprise to some of your clients however, particularly medium and smaller employers – our research suggests there are currently quite low levels of awareness and planning amongst employers affected by the workplace pension reforms in 2014 and beyond.

 One thing employers will need to take into account is the need for the automatic enrolment scheme they choose to provide an appropriate ‘default’ investment fund. 
  
 But how do you know that the scheme an employer chooses will provide workers with an appropriate approach, focused on achieving good outcomes for all members?
  
 And, in a DC environment, what can pension providers do to ensure that members get more certainty on outcomes? Assessing the scheme you intend to use against the Organisation for Economic Co-operation and Development (OECD) roadmap is a good starting point.The OECD roadmap sets out the following principles:
 
 1. Ensure the design of DC pension plans is internally coherent between the accumulation and payout phases and with the overall pension system.
 
 2. Encourage people to enrol, to contribute and contribute for long periods.
 
 3. Improve the design of incentives to save for retirement, particularly where participation and contributions to DC pension plans are voluntary.
 
 4. Promote low-cost retirement savings instruments.
 
 5. Establish appropriate default investment strategies, while also providing choice between investment options with different risk profile and investment horizon.
 
 6. Consider establishing default life-cycle investment strategies as a default option to protect people close to retirement against extreme negative outcomes.
 
 7. For the payout phase, encourage annuitisation as a protection against longevity risk.
 
 8. Promote the supply of annuities and cost-efficient competition in the annuity market.
 
 9. Develop appropriate information and risk-hedging instruments to facilitate dealing with longevity risk.
 
 10. Ensure effective communication and address financial illiteracy and lack of awareness.
 
 NEST has developed an investment approach which, with its wide asset diversification and low charges, dynamic risk management, strong investment beliefs and governance, is not only consistent with the OCED roadmap and other indicators of ‘Good DC’ (such as that set out by the Pensions Regulator) but is suitable for most workers in the UK. Let’s look at how.
 
 NEST has been designed for automatic enrolment and is legally required to be run in the interests of our members. That drives everything we do, and nowhere is that clearer than in our approach to investment.
 We’ve carried out a huge amount of research to help us design an appropriate investment strategy that should meet the needs of allour members, whether they are in our default funds (target date) or one of our other fund choices.
 
 We offer our members access to a diverse asset range, managed by experts in their field, with strong governance and all for a very low charge. It’s an approach that is already winning awards.
 
 Our default approach, the NEST Retirement Date Funds, is a suite of yearly target date funds. Unless they make a different fund choice, membersare automatically assigned to the Retirement Date Fund which matures in the year in which they expect to retire.
 
 Each Nest Retirement Date Fund has a dynamically managed risk-derivedasset allocation which yields three broad phases: younger members invest in the foundation phase allocation for a few years before moving into the growth phase (the longest phase) and finally the consolidation phase as they approach retirement.
 Our members contribute to economic growth throughout their working lives. Our job is to ensure that by saving, they share in future prosperity.
 
 The growth phase seeks to beat inflation by at least 3 per cent over the long term, after all charges. By investing internationally and across asset classes we tap into global growth where and when it is available. Members will generally be invested in the growth phase asset allocation for most of their savings’ career.
 
 The consolidation phase dynamically de-risksthe members’ investments and, targets a mixture of cash and annuity matching assets.
 
 The Foundation phase seeks to grow younger members’ money so that it at least keeps pace with inflation after charges are deducted, while protecting them from sudden losses which can have a profound effect on their confidence in pension saving.
 
 So does our approach mean greater certainty for members? We believe so. Our modelling indicates that we achieve our objective of significantly beating inflation in 95 per cent of the simulated scenarios.
 
 We think our investment approach, combined with our clear communication and help buying a retirement product ticks a lot of boxes in terms of what OECD says what ‘good’ looks like.
  
 FInd out more on NEST's website www.nestpensions.org.uk
  

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