The 7th and final part of the Asset Class ‘Back to the Future’ series. Having opened our Defined Contribution business a year earlier, Tara Gillespie reflects on our approach to helping DC members in the 2016 edition.
Focus on the Future
What we said…
The theme of our 2016 edition of Asset Class was focusing on the future and starting with the end in mind.
For DB Schemes specifically, this was about understanding the end-goal and the most secure way of getting there. It could be full funding on a prudent self-sufficiency basis with the aim of managing the scheme into run off. Or it could be targeting buy-out and transferring responsibility to an insurance provider.
The journey of a DB Scheme can be split into opening, middle and end stages. The right investment strategy, hedge ratio and risk tolerance for a Scheme is defined by where they are in the journey and what their ‘end-game’ target is. Starting with the end in mind continues to be core to our business.
…and what happened
All of the strategies we reviewed in the 2016 edition of Asset Class are still used by our clients. They are assessed by our Investment Committee every month.
Zooming out from DB pensions, our focus on the future has seen the growth of our DC business. The 2016 edition of Asset Class featured our first ‘DC Special’.
This looked at how we believe the industry should be thinking about DC in the following areas:
1. Starting with the end in mind – as with DB schemes, always think about what the end result should
be for DC members.
2. Target a Specific Outcome – such as minimum income in retirement.
3. Investment Strategy Design – getting the default strategy right for your members to ensure they
progress towards their goals in the most effective way.
4. Empower Your Members – using the EAST framework by making communications Easy,
Attractive, Social and Timely to help your members best help themselves.
The fundamentals of what we said last year still stands true today. However, we have developed our thinking and tools, and can share our experience of putting these ideas into action.
Starting with the end in mind
The DC savings journey
Like DB pension schemes, DC savers also have an opening, middle and end stage to their journey (see below).
And in each stage, the appropriate asset mix, risk tolerance and return requirements should be considered relative to the income at retirement needs of members. For example, achieving the living pension at retirement.
The reason this philosophy is so fundamental is because not taking enough risk in the opening stage is as bad for the outcome as taking too much risk in the end stage. Only by thinking ahead can you, and your members, make informed decisions about today.
Target Members’ Outcomes – Importance of Value-for-Money (VfM)
The tangible outcome in terms of income at retirement is the primary objective for a DC saver. However, to achieve the best outcomes members must be getting the best value.
Assessing and achieving VfM is fundamental to DC investment strategy design. We aren’t just talking expensive = bad, and cheap = good. There are a broad range of factors that feed into whether a strategy is achieving VfM, including expected return, risk and objectives. All of this need to be considered in the context of what the member is actually looking to achieve. One man’s meat is another man’s poison and all that.
We have designed a clear framework to help Trustees quickly digest their scheme’s data and easily assess all factors to determine whether a default strategy is offering VfM.
Investment Strategy Design – No One-Size-Fits-All
Central to any DC offering is the default fund. However, no two people are the same. So why do we think the investment needs of an entire population of employees can be met by a single default fund? What if you could offer your members a personalised default strategy that better meets their needs? You can!
Working with an online financial advice platform, we have designed and implemented a personalised default strategy approach for our members. Through technology we believe DC will become increasingly personalised to help achieve the best outcomes for people, not averages.
Empowering your Members – How to apply the EAST Framework
The EAST framework is a powerful tool for encouraging action. It continues to be our mantra when it comes to encouraging people to save earlier and save more. However, EAST means different things to different people. The best communication approach will depend on their generation, location, wealth and a variety of other factors.
Using powerful data visualisation, you can focus your communication efforts in the right places at the right time. We can bring member data to life so you can easily identify who is off track, where they are and how best to target them with Easy, Attractive, Social and Timely messages.