GLOBAL - Fiduciary roles in defined contribution (DC) schemes need to be "viewed in a new light" with a possible move from an advisory approach to adopting comprehensive best practices, according to findings from State Street's latest Vision report on pensions.
The research into 'Strengthening the DC Model for the Future' encompasses a range of issues including the implications of a shift from defined benefit (DB) to DC, regulatory developments and the structure of new DC plan models.
On the issue of future DC models, the report highlighted the need for incentives to encourage people to save, such as auto-enrolment and tax relief, while the design of the default fund and investment strategy is equally important in both encouraging participation and building up savings.
That said, State Street claimed default funds with "too conservative a strategy early on has a negative impact on achieving retirement income goals". This is in comparison to comments by the Personal Accounts Delivery Authority (PADA) at the NAPF conference where they claimed a conservative start could encourage persistency as it reduces volatility. (See earlier IPE article: Persistence more important than risk in NEST early years)
The report also discussed the role of target date funds and lifestyling as investment strategies for DC, and argued there are some concerns with target date funds - after some investors in the US reported losses of more than 30% in 2008 - and a potential need for benchmarks, it believes "time will show that, for most people, target date funds are the future".
State Street argued these types of funds are heavily passive, very transparent and comparatively low-cost. So by using target date funds to act as an effective default investment option they "help address one of the major challenges facing DC plans: the huge number of people who currently have inappropriate asset allocations".
The latest Vision report noted that "good governance is the starting point for strengthening the DC model", and said this includes more focus on the role of the fiduciary committee and risk controls.
It suggested DC plans require the same level of focus on governance issues as DB schemes, with plan design and member education considered to be some of the most effective strategies for these types of schemes.
The report added that fiduciary roles for DC schemes also "need to be viewed in a new light", because while many countries have taken a purely advisory approach until now, "recent events suggest that it is time for a more comprehensive adoption of best practices".
It warned that while the trend towards DC schemes has "eased the future burden of pension liabilities on corporate balance sheets, it has not erased the notion of fiduciary responsibility. However, the commonly understood meaning of the fiduciary role has blurred to some degree".
Some actions highlighted by the report for DC schemes to consider when reviewing governance strategies include:
The report stated: "Recent events strongly suggest DC plans may find it useful to leverage the accumulated experience of DB plans. Moreover, as witnessed by the interdependence of pension funds' performance in an increasingly globalised financial framework, the crisis also raises the question of whether it is time to consider globalised institutional approaches [pension pooling vehicles] to manage DC plans. This may include a more global approach to governance standards."
James Phalen, executive vice president of State Street, added: "Because DC represents the future of retirement plan models in many markets, the financial services industry should continue to work creatively and collaboratively with other stakeholders — including policymakers — to solve one of the most compelling social challenges of our time: ensuring sufficient funding to support a decent quality of life in retirement for an ageing population."
If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com
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