Discussion – DC Multi Asset
DISCUSSION: DC MULTI ASSET
For institutional investors, 2022 was an eventful year. There was volatility, inflation hit double figures and conventional investment theory was challenged. But how has that changed the way diversified defined contribution (DC) portfolios are being constructed to mitigate longevity risk and further volatility? To find out, portfolio institutional sat down with a panel of those with influence on the defined contribution investment chain.
How do you see the new investment envi- ronment we are entering following last year’s volatility? Jos North: 2022 was the encapsulation of a new investment environment. When I say that, it often gets conflated to mean that what we experienced last year we are going to experience again and again and again. That’s not necessarily the case. However, some of the themes of last year, and in the wider post-pandemic era, are the big themes we need to think about as DC asset allocators. For the 40 years to 2020, we had a period of declining interest rates. One of the rea- sons for that has been low and stable in- flation. So we have had low real world vol- atility and low financial market volatility. We are now in an era where, on average, we are going to have higher inflation. It probably will not be as high as it is today, but it is going to be higher than 2%.
34 | portfolio institutional | September 2023 | Issue 126
There will be higher interest rates and higher volatility, so we need to think about the implications for investment strategies. Natalie Winterfrost: Higher interest rates are an interesting challenge. People didn’t want to take annuities because at the rates they were people couldn’t afford to retire on an annuity. Hence, we saw the intro- duction of drawdown and investing through retirement. We re-designed our default pots to target those. One challenge is: if annuities are priced on higher rates again, are we going to flip back to the idea that the security of an annuity is appealing if it is affordable? This could mean our defaults are target- ing the wrong outcome. More generally, because savings rates are too low, people need to invest in growth assets while they are saving. This can con- tinue through retirement if they take the
drawdown option. Hopefully, they are looking at real assets that will keep up with inflation, rather than fixed income markets. We are also facing the levelling up agen- da. The government wants DC money to support growth. Of course, they hoped the defined benefit money might do this but they have realised that it has a short life and so does not have the timescale to start allocating to infrastructure-like assets.
The question is: can that money come from DC? The early stage capital needed is probably a little too high octane for most DC members, but it is an area to consider.
The government wants your DC schemes to invest in infrastructure, Alan. Does that interest you? Alan Pickering: Hands off! I have been
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