gung-ho in trying to chase the latest investment trends. They ask how they can do that properly.
Due to consolidation, it will be interesting to watch how the market develops when there are several large master trusts.
Sounds like diversification is not going to be a problem. Fearn: Historically, we have put equities and bonds on the glide path. I’m not sure that is going to wash going forward with the impacts we have seen in the past few weeks. Investment strategies need to be governed, monitored and consulted correctly. You have to think about the membership. We will see continued consolidation towards master trusts, which is the right thing to do. Master trusts are in a good place to watch, govern and check on member’s strategies. The endpoint is becoming more of an issue. We have a few years before people start panicking. But even now, being in the wrong strategy can cause issues for their future plans. It is try- ing to create an environment where the members are taken on an investment journey, one that they are going to expect a decent outcome from for a reasonable cost, but not the cheapest. Bucksey: Most of us are in a good position to harness this thing called inertia. You want people to be saving for as long as pos- sible to get the benefit of compounding. That is the magic of investment and you are only going to do that if you keep contributing.
Inertia has been a success in getting people into pensions and staying in them. The dichotomy we quite often have is that pro- viders can be criticised for not doing more on member engage- ment. Actually, the last thing you might want to do is over engage younger members because you destroy that link to inertia of getting money in. Most master trusts have a good sense of keeping less engaged members saving. Then, with all of the money flowing into master trusts and the ability to be agile in improving the default investment option, disengaged auto-enrolled members is not necessarily a bad thing.
In the United States, you can put people back into the default after three years of self-selection, which could otherwise be self-harming, but not necessarily if you have a well-managed default that you are monitoring and tweaking when necessary. You need to ramp up member engagement as members get closer to retirement, so if they are tracking towards an annuity purchase they are aware of what they are tracking and can work out if it is right for them.
Over recent weeks, annuity prices have reduced and while the optics do not look great as members in bonds may have seen a drop in their fund value, if they are going to buy an annuity you are matching off the two. Which is what they were designed to do: a mixture of bonds and gilts tracking annuity pricing.
12 November 2022 portfolio institutional roundtable: Defined contribution
Delo: Of course, members are now out of the habit of buying annuities because the general view has been that they are poor value. We need to recommunicate on this pretty damn quickly. Bucksey: Our standard glide path is flexible and is based on staying invested. We have more than 1 million members and only 1,800 have selected an annuity-target glide path. It is rela- tively modest, but that is not to say we have not looked through the portfolios to see what our exposure to gilts and bonds is. Our flexible, stay invested glide path has held up pretty well. Segars: Can we speak about scale and looking beyond portfolio construction? As master trusts continue to grow, which they will quite rapidly over the next few years, there are broader influences that they should have. First is around the policy agenda by making sure we have a pension system that works for everybody. It is also using our leverage, individually and collectively, on stewardship and ESG.
I remember in a previous existence, individual funds being picked off because they were not big enough to have influence. But as our assets under management grow, we should be more influential over that corporate governance and stewardship agenda. It is important that we do not forget that when we talk about the role of master trusts.
Another issue is inflation. Are DC schemes reviewing their default funds in light of the rising cost of goods and services? Sheth: Most default funds probably are not going to deliver value in real terms if we settle on a higher level of inflation. Given some of the supply-side shocks that are not going away anytime soon, we are likely to see more inflation volatility too. When you look at history, higher inflationary environments see equities and bonds correlate positively. It is not unusual that we have seen equities and bonds behave similarly. We can see a future scenario where cash outperforms bonds and bonds outperform equities. I am guessing that most default funds are not designed to cap- ture that. It is not just about alternatives or infrastructure, but also thinking carefully about how to maintain pace with infla- tion and not get whipsawed with market volatility. Bucksey: There is a massive timing issue here. If you are young, you can take depressed equity markets. If you are closer to retirement, then it is a bigger problem. Smart: There is a timing issue and a path dependency issue. The point we tried to bring out in our value for money discus- sion paper was the importance of recognising the path is dependent on outcomes.
If you are just measuring the outcome of a DC default fund rel- ative to inflation, that completely misses the experience mem- bers are getting at different cohorts. If you need a big return
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