Maximising Returns - Part 1: Future of DC Investment Strategy

June 2010

Group DC pension schemes face a devilish conundrum that has major implications for their investment strategies. They are simultaneously under pressure to maximise returns and to reduce risk. While not mutually exclusive, these twin obligations require a fundamental re-evaluation of current strategy.

Given the recent turbulent economic and investment climate, issues of volatility have become of major concern to DC pension scheme sponsors, trustees and members. The precipitous collapse in equity values from September 2008, and the devastating impact this had on many pension pots, exposed the risk of over-reliance on equity investment.

De-risking is therefore becoming a priority for trustees, sponsors, advisers, providers and members, especially as there is very little appetite for risk among the financially unsophisticated members who comprise the majority of group DC pension schemes.

Recent events have challenged the long held assumption that equities could always be relied upon to outperform bonds over the long term and deliver sufficient pension income.

At the same time there has been an explosion in choice in terms of pension fund and retirement options. From the mid-1990s the traditional choice between With-Profits or Managed funds has been replaced by the introduction of a plethora of new fund types.

At the same time much greater variety has been introduced in terms of retirement beyond the traditional straight choice between drawdown and annuity.