Trustees called on to drive pensions innovation and guarantees

UK - A consultancy on UK pensions liabilities has suggested the defined contribution pensions market could learn lessons from the retail investment sector and use its purchasing power to buy members a form of structured guarantee.

Redington officials today claimed the UK defined contribution market has changed little over the last 15 years. Yet the changes expected in 2012 - with the introduction of the UK National Employment Savings Trust (NEST) and auto-enrolment - means pension funds could tap new innovations in a bid to deliver better management and returns for future retirees.

Rob Gardner, co-founder of Redington, argued "the DC market in its current guise is not fit for purpose for people who need to plan for retirement" as "DC designs have neither the governance nor the asset allocation nor the products to meet the needs of DC members".

That said, he believes existing pension trustees could do something about it by challenging the existing framework and using the huge sums of money likely to be saved over the next few years to buy guarantees to better protect assets from volatility ahead of retirement.

Ian Maybury, co-head of ALM and Investment Strategy at Redington, noted what future retirees will want in the future is a degree of flexibility around the actual retirement date. But lifestyling investments means there is a need to shift assets from higher-risk strategies such as equities into fixed income and cash, which in turn could expose pension fund members to potential losses ahead relatively close to their chosen retirement dates.

The solution, suggests Maybury, is to introduce a form of guarantee, perhaps based around retail-targeted structured products, which could be negotiated by the pension trustees as he has sought to do so.

"We want to be protected in some way. So it is perhaps possible to make some form of guarantee. The issue is they don't tend to come cheap. But if you have a big membership of assets, you have major purchasing power for a guarantee," said Maybury.

"Some of the larger DC schemes could drive this. But the clash between TPR and FSA over advice has to be addressed. And if you are 10-15 years from retirement and seeking a 70% guarantees on existing assets, it will be relatively cheaper than a 90% guarantee close to retirement. The key is doing it in a low cost way," he added.

No figures can be given on the possible pricing of guarantees at this stage as they would also be dependent on when the products were bought. As Maybury pointed out no-one considered buying a guarantee in 2005-06 when equities were rallying, rather than now when investors might be more wary of losing pension assets.

The problem is not confined to the UK as pensions officials across Europe have sought new thinking on pension guarantees in light of the recent economic crisis.

Any process of change may not be easy for trustees, however, as many employers who currently have DC arrangements opted to open trust-based plans carrying many governance complications, such as adminstration problems when transferring assets , said Maybury.

"Many employers have created trust-based schemes, after having a DB scheme. Was that a good idea? With hindsight, probably not, it would probably have been done very differently. Employers some reluctance about selecting a provider because it would create problems around issues such as mergers and acquisitions.
Trustees called on to drive pensions innovation and guarantees

UK - A consultancy on UK pensions liabilities has suggested the defined contribution pensions market could learn lessons from the retail investment sector and use its purchasing power to buy members a form of structured guarantee.

Redington officials today claimed the UK defined contribution market has changed little over the last 15 years. Yet the changes expected in 2012 - with the introduction of the UK National Earnings Savings Trust (NEST) and auto-enrolment - means pension funds could tap new innovations in a bid to deliver better management and returns for future retirees.

Rob Gardner, co-founder of Redington, argued "the DC market in its current guise is not fit for purpose for people who need to plan for retirement" as "DC designs have neither the governance nor the asset allocation nor the products to meet the needs of DC members".

That said, he believes existing pension trustees could do something about it by challenging the existing framework and using the huge sums of money likely to be saved over the next few years to buy guarantees to better protect assets from volatility ahead of retirement.

Ian Maybury, co-head of ALM and Investment Strategy at Redington, noted what future retirees will want in the future is a degree of flexibility around the actual retirement date. But lifestyling investments means there is a need to shift assets from higher-risk strategies such as equities into fixed income and cash, which in turn could expose pension fund members to potential losses ahead relatively close to their chosen retirement dates.

The solution, suggests Maybury, is to introduce a form of guarantee, perhaps based around retail-targeted structured products, which could be negotiated by the pension trustees as he has sought to do so.

"We want to be protected in some way. So it is perhaps possible to make some form of guarantee. The issue is they don't tend to come cheap. But if you have a big membership of assets, you have major purchasing power for a guarantee," said Maybury.

"Some of the larger DC schemes could drive this. But the clash between TPR and FSA over advice has to be addressed. And if you are 10-15 years from retirement and seeking a 70% guarantees on existing assets, it will be relatively cheaper than a 90% guarantee close to retirement. The key is doing it in a low cost way," he added.

No figures can be given on the possible pricing of guarantees at this stage as they would also be dependent on when the products were bought. As Maybury pointed out no-one considered buying a guarantee in 2005-06 when equities were rallying, rather than now when investors might be more wary of losing pension assets.

The problem is not confined to the UK as pensions officials across Europe have sought new thinking on pension guarantees in light of the recent economic crisis.

Any process of change may not be easy for trustees, however, as many employers who currently have DC arrangements opted to open trust-based plans carrying many governance complications, such as administration problems when transferring from higher risk assets, such as equities, on a regular basis, to bonds and cash ahead of the decumulation phase, said Maybury.

"Many employers have created trust-based schemes, after having a DB scheme. Was that a good idea? With hindsight, probably not, it would probably have been done very differently. Employers some reluctance about selecting a provider because it would create problems around issues such as mergers and acquisitions.

 "Even if I'm not giving advice, my members probably think they are getting advice. And communicating that message is quite difficult.

"And the transfer of moving from equities to bonds and cash gives way to administrative error and can cause problems for trustees. But we can reduce the administrative cost within the work, through innovation," he added.
"Even if I'm not giving advice, my members probably think they are getting advice. And communicating that message is quite difficult."

Maybury said earlier: "Governance is perhaps going to be more important for DC because there is the interaction between The Pensions Regulator and the FSA, because members need advice at retirement and trustees are not qualified to give advice."

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com