1The DC Future Book: Unravelling Workplace Pensions. 7th edition. September 2021. The Pensions Policy Institute, in association with Columbia Threadneedle Investments. p.41. For master trusts, the average participation rate in the default was 90%. See p.19.
2The power of inertia, or status quo bias – that is, doing nothing or maintaining one’s current or previous decision, is well documented. The first empirical study of this bias was published in 1988. See: William Samuelson and Richard Zechhauser, “Status Quo Bias in Decision Making” Journal of Risk and Uncertainty. Volume 1, pp.7–59 (1988).
3Rather than being required to make an active decision to opt in.
4A textbook example of the power of the default and the prevalence of inertia is the extent to which smartphone users stick with their smartphone’s default settings (ringtone aside), despite the ease with which one can change these settings. The presumed consent model of opting people into organ donation, unless they proactively opt out, is another example. In a pensions context, the power of inertia is exemplified by the low opt-out rates associated with auto enrolling (opting-in) eligible employees to an occupational pension scheme. These, so-called nudges, which typically harness the inertia of the disengaged, are well documented. Nudges are designed to subtlety but predictably influence, rather than coerce, people’s behaviour so as to make them, and typically society, better off, without harming or disadvantaging them or others in the process. See: Richard H. Thaler and Cass R. Sunstein. Nudge – The Final
Edition. Allen Lane (2021). pp.3-8.
5PPI (September 2021) op.cit. pp.24-27.
6See: Generating retirement outcomes to be enjoyed and not endured. Chris Wagstaff. Columbia Threadneedle Investments. February 2018. p.42.
7Rarely are the needs of a scheme’s DC membership regularly surveyed.
8While there are manifold approaches to managing multi-asset fund mixes, whose return objectives are typically expressed as an ‘inflation plus X%’ or a ‘cash plus Y%’ absolute return target, only the very best achieve a combination of robust real returns with low levels of return volatility and susceptibility to equity market drawdowns. Crucially, a successful multi-asset approach demands genuinely skilful dynamic asset allocation and truly active management. Of course, making the right asset allocation calls in selecting and dynamically altering the asset mix is by far the biggest determinant of success in adopting a multi-asset approach, with this largely being incumbent on real equity returns and those of other asset classes in the multi-asset mix being positive and greater than cash returns, with the returns of these other asset classes being lowly correlated with equities and relatively volatile to dampen equity volatility. See: Wagstaff (February 2018). op.cit. pp.32-33.
9The underlying asset allocation of target date funds evolves as the target date, which should align with the member’s chosen retirement date, approaches.
10Failing to diversify across multiple lowly correlated risk assets, with a multitude of diverse return drivers and risk premia, across multiple time periods can leave default funds wide open to investment sequencing risk when markets turn tail.
11These impediments principally comprise increased due diligence, accommodating higher management and performance fees within the 0.75% charge cap, high minimum investment sizes and the inability of most insurance
platforms to offer and administer illiquid assets. For an explanation of each and how they might be overcome, see: It’s time for investment to do more of the heavy lifting. Chris Wagstaff. Columbia Threadneedle Investments. June
2019. pp.18-23. Reinforcing these points, the annual IPE infrastructure survey of global institutional investors reveals that the top three reasons for not investing in infrastructure were: illiquidity, sub-scale and inability to undertake due diligence. See: Infrastructure investor survey 2021. Richard Lowe. IPE. September/October 2021 edition.
12A roadmap for increasing productive finance investment. The Productive Finance Working Group. September 2021. The TPFWG is co-chaired by the Governor of the Bank of England, the Chief Executive of the FCA, and the Economic Secretary to Treasury. See: https://www.bankofengland.co.uk/report/2021/a-roadmap-for-increasing-productive-finance-investment
13Rona Train, DC Partner at consultancy Hymans Robertson, notes in a recent paper that, “All DC fiduciaries should ask themselves: 1. Will the introduction of illiquid assets give me something I can’t access in liquid markets?
2. Will they give me better long-term risk-adjusted returns for my members? 3. Can I access them in a way that does not introduce unnecessary risk or complexity to the operation of my overall portfolio? Answering yes to each of
these questions is vital before progressing the discussions any further.” See: PPI (September 2021). op.cit. Illiquid assets – are they the answer in DC? pp.54-55.
14Long-Term Asset Funds (LTAFs), due be launched in late-2021, with DC schemes in mind, will be open-ended funds, authorised by the Financial Conduct Authority (FCA), that invest in long-term, illiquid assets. While not daily dealt, units in the fund will be able to be sold at set intervals depending on the investment strategy adopted by the investment manager and the availability of cash to meet redemption requests.
15The TPFWG also notes that, “As DC schemes consolidate and the industry builds scale, the DWP should:(i) continue to monitor the overall impact of the charge cap; (ii) continue to consider how to reconcile performance remuneration (that may be associated with greater overall value for members) and the charge cap rules.” TPFWG (September 2021). op.cit.p.8.
16In seeking to allocate more than £1bn into private equity, NEST is confident that it will successfully challenge the traditional private equity management fee plus performance fee model, declaring it won’t pay any performance fees or carried interest (the share of any profits that the general partners of private equity funds receive if the fund’s returns meet a certain threshold). See: NEST challenges private equity fees. Sarah Rundell. Top1000Funds. 30 September 2021.
17See: Pensions Watch – edition 1 (November 2020): https://www.columbiathreadneedle.co.uk/en/inst/insights/pensions-watch-november-2020/ and edition 7 (April 2021): https://www.columbiathreadneedle.co.uk/en/inst/
18Based on Columbia Threadneedle’s capital market assumptions and calculated using a multi-factor capital asset pricing model (CAPM). The exposures of each asset to the factors are estimated using a historical data set which covers multiple financial market regimes. See: Planning for the long-term with capital market assumptions. Stuart Jarvis, Joshua Kutin, Lorenzo Garcia and Kavit Tolia. Columbia Threadneedle Investments. March 2021. Please note that returns are not guaranteed, as determining the prospective illiquidity premium is not an exact science, in the same way that calculating those other risk premia which prospectively contribute to an asset’s return are typically estimates, albeit calculated using well established financial economics methodologies.
19Columbia Threadneedle Investments (June 2019). op.cit. p.6.
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