Discussion – DC Multi Asset


safe, but to do that within the charge cap is challenging. Stewart: We have made progress towards that. We have target-date fund approaches that expand to and beyond retirement. But for me, there are two bits needed to make that happen, which would make a huge difference in terms of value. One is that most individuals who want to take an income in retirement end up in a situation where they move from an insti- tutional world into a retail one. And there is an upfront advisory cost and ongoing costs of hundreds of basis points a year. They are not in an institutional world, so maybe there is a debate around the level of governance rigour around the process and the quality of investments available. DC master trusts have the potential to do more for members and will have the ben- efit of scale going forward. To me, an obvious value improvement we can make is to default at that point. If an individual does not make an active choice, they would remain invested and can draw on what they have built up. To me, it does not make much sense to build up assets in one vehicle and then sell them to buy similar assets in another vehicle to then draw on and pay more for the privilege.


Fearn: Or to put it in cash. Stewart: The other point is that annuitisa- tion in later life, which is going to require an intervention from the individual, becomes tricky. Longer term, I can see a market for deferred annuities. Fearn: That is what we are working towards, but it is not there yet. Stewart: Agreed, we don’t have the scale yet.


North: Callum, how are you thinking about DC portfolio construction? Stewart: We need to strive for much better than we currently have. The impact of the environment we operate in today with an emphasis on cost is so constraining in terms of potential outcome. Most trustees we speak to tend to support the idea that more freedom would be helpful to deploy different beliefs. If you look at the outcome differential we could have through a more unconstrained approach, within the master trust market the difference in retirement outcomes from worst to best is as wide as a 60% range for younger savers. That is within the cost constrained world. Price points sit within a range of 10 basis points differ- ence from lowest to highest, so headline strategy still drives outcomes. If we were to increase that by 10 basis


points, we could improve retirement out- comes by well over 10% for younger indi- viduals. If we could increase the price point by 20 basis points we could increase retirement outcomes by well over 20% for those individuals. If we can introduce sophistication in the later


stages, we could help avoid the issues we had last year where we are reli- ant on a constrained range of generally cheaper asset classes. We just can’t rely on a constrained universe to provide the diversification we need. So where should it go? I would have less reliance on traditional markets, specifical- ly within bonds. Also, DC schemes gener- ally under deploy to real assets such as infrastructure and real estate. There tend to be small and listed allocations to prop- erty and infrastructure rather than access to the physical underlying asset. We can do more there to diversify and offer long- term inflation protection. But the crucial missing piece of the puz- zle, given the completely different eco- nomic regime we are moving into – I say different because we don’t know what it will look like in five years’ time – is that we need to bring relevant expertise closer to the investment decisions. This means we need to carefully select fund managers


Providers are con- strained because we know at the end of the story there is going to


be pressure on cost. Callum Stewart


Head of DC investment Hymans Robertson


38 | portfolio institutional | September 2023 | Issue 126


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