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Defined contribution default strategies could better meet the needs of some members by seeking higher returns or reducing volatility, a new paper by the Pensions Policy Institute argues. Are schemes doing enough to serve different groups within the membership?
In a new report, ‘Could DC pension default investment strategies better meet the needs of members?’, the PPI explores the extent to which DC default strategies could be redesigned to better meet the needs of certain groups of scheme members. It considers whether members with certain characteristics might benefit from more focus on returns, or risk management, than members who fit the typical profile.
The report recommends increasing the allocation to alternatives within defaults, saying that this could enhance returns while also increasing diversification, using existing data on members, such as pot size, to provide prompts about using self-select investment strategies, and gathering more data to make DC default investment strategies more tailored.
Could data and alternative assets improve default strategies?
The PPI acknowledges that default investment strategies are “inherently broadbrush” because they are required to meet the needs of many people but argues that greater use of data should be considered in doing so.
“The inherent nature of defaults makes it difficult to target variations at particular people, but there are potential strategies,” such as greater use of data, said Daniela Silcock, head of policy research at the PPI.
Silcock said that “judicious investment into illiquids and alternatives could, in some cases both enhance returns and reduce volatility, benefiting the whole membership”, but warns that these strategies will require extra time and resources. She said they must not come at the cost of what defaults were designed to do, however: “It is important not to lose the benefits of default strategies, in particular, the low cost and simplicity of the safety net that they provide for those with low financial capability. As scheme managers look to provide a better service to a greater number of members, the benefits of defaults must be kept in mind.”
Do you think default strategies should be more tailored?
