NAPF Investment Conference 2015: Experts debating the challenges posed by the charge cap have backed the use of dynamic asset allocation and volatility triggers in low-cost defined contribution strategies.
Defined contribution pension schemes and providers will face new investment challenges from April 6 with the arrival of the 0.75 per cent charge cap.
Panellists at the National Association of Pension Funds' conference in Edinburgh on Thursday debated the impact of the default fund cap on member outcomes.
Richard Butcher, managing director at professional trustee company PTL, and chair of the discussion, opened the session by saying he was instinctively against the charge cap because it failed to address the deeper issue of poor governance.
"It's a device that treats the symptom of the disease. If we fix governance the symptom of high charges goes away," he said.
Butcher added he thought the desire for scale could have a negative impact on market competition.
"We’ve got an odd situation where we want scale in DC to drive good value while at the same time have competition. You can’t have fewer schemes and greater competition at the same time.”
When asked to vote on whether it is possible to invest in a "smart" way below 75 basis points, more than half the audience (59.4 per cent) said it was possible, while 37.5 per cent said it was not.
Dynamic approach
Alistair Byrne, senior DC investment strategist at State Street Global Advisors, compared the challenge of delivering investment performance within the charge cap to buying a new car on a £10,000 budget.
“One of the main implications is that I can’t get everything I want,” said Byrne. “I’m going to have to think about how to get maximum impact within that budget.”
Byrne called on DC schemes and providers to think carefully about how they draw on available products as an engine for investment growth while also smoothing the journey for members through risk protections.
He said dynamic asset allocation strategies overlaid across underlying indexed investments could deliver growth while minimising downside risk.
“In terms of the budget, we’re spending money on the dynamic side of things and reducing costs by using underlying index funds,” said Byrne.
He added that volatility triggers could be a cheap yet effective way of reducing risk to underlying equities from extreme economic conditions.
Keep focus on outcomes
Simon Lee, head of investment and group pensions at Lloyds Banking Group, said it was important not to lose sight of members' target retirement outcomes despite the heightened focus on the charge cap.
Lee thought it critical that schemes have an in-depth understanding of their membership, an insight that could be achieved through segmented analysis.
He added that while it was important to design a default fund that meets the needs of the majority, driving up pension contributions could help offset the need to take higher risk in order to reach retirement targets.
"Members on low-to-average salaries, likely the majority in most DC schemes, may not need to take a disproportionate amount of investment risk if they commit to making adequate contributions for a long enough period," Lee said.
In a Q&A session, all three experts dismissed the possibility of including transaction charges in the 75bp cap.
Byrne said the variability of transaction charges over time would present significant challenges.
"Trying to cap that could be tying managers' hands to respond to the the market – I would be concerned," he said.
