How Molson Coors built flexibility into its default

Many schemes towards the higher end of the market, in terms of cost and return objectives, are employing third-party managers to determine their asset mix in search of long-term returns.

“Part of the objective... is to lessen the exposure to declining markets by reducing holdings in the declining asset class prior to, or early during a decline – meaning there is more money to invest when the market heads upwards again,” said a spokesperson for the brewer.

A dynamically managed default fund would allow members that did not make an active investment decision to maximise retirement incomes, the spokesperson added. 

In the asset allocation throughout the growth phase the default is actively managed and in normal market conditions there is a target allocation of 50 per cent to a diversified growth fund with the rest in equities, according to the National Association of Pension Funds’ Default Fund Design and Governance in DC Pensions report last week. 

The fund has a tailored derisking phase, which can begin from five years prior to retirement, with a reduction in equity exposure and the introduction of gilts and cash.

Stephen Budge, head of defined contribution investment at KPMG, said active management of asset allocation in the growth phase was common, but was becoming more common in target date funds coming to market.

Some TDFs are taking a more active approach in managing between the periods of growth and pre-retirement to make the process more fluid, rather than taking a default lifestyle strategy, which can be more mechanistic.

Monitoring performance

However, dynamic asset allocation introduces a new element of risk and it is uncertain whether it will add value to members’ funds.

“From a governance point of view, the person needs to be able to do a better job,” said Budge.

This means monitoring the manager or provider making investments is key to ensuring the scheme is performing better than it would under a lifestyle strategy.

We are also starting to see dynamic asset allocation in target date funds coming to market

Mercer, manager of Molson Coors’ default fund, has discretion to change the underlying fund managers if they wish, according to the report.

The sponsor also reserves the right to bring in a third-party adviser to conduct a review and benchmarking exercise to evaluate Mercer’s approach against the market on a rolling three to five-year basis, the report states.

However, the company said that with more time and unlimited budget to redesign their default arrangements, they would have liked to have conducted a wider market review, with more regular monitoring.

Nico Aspinall, head of UK DC investment consulting at Towers Watson, said schemes should monitor whether the provider they have chosen has had any changes in management and whether they are using the same market metrics to decide if changes should be made to the portfolio. 

“Look at the decisions the manager has made, the points at which they have changed the portfolio. You can look at those decisions compared to what the portfolio used to look like and say, ‘Is it better as a result?’ either in out-and-out returns or potentially in risk or volatility,” said Aspinall.

“This is where DC becomes quite an interesting set of issues because potentially it’s not capital volatility you should be monitoring, it’s much more pension outcome,” he added.