Inherent problems with their investment approach mean private sector DC systems around the world have not been able to match DB schemes for investment returns says Towers Watson.
The consultancy says DC schemes will only be able to create value for participants if they can address their implicit disadvantage. The firm says the wide variation and uncertainty in DC schemes’ objectives – including questions over whether the plan offers a savings vehicle up to retirement or invests for members in retirement – make it less clear how funds in aggregate should be best invested.
Towers Watson says greater use of scale and pooling solutions are needed to overcome the inherent disadvantages associated with DC.
Towers Watson head of UK DC investment Nico Aspinall says: “To join the competition for investment returns, DC schemes must face up to their disadvantages and be clear about the mission and investment objectives so that risk can be clearly framed. In order to do this governance needs to be addressed first, which is why we very much welcome the UK Government’s ratcheting up of governance requirements with the explicit intention to close schemes that fail to demonstrate value for members’ money.
“The ongoing debate about whether a plan is designed for retirement, whether it should try to secure an income stream or provide an ongoing savings balance reflects the fast-changing long-term investment marketplace. This is coupled with the complexity created by a large number of individual members, each with communications, accounting and transaction needs. It is no surprise then that DC schemes and their fiduciaries face difficult decisions about not only purpose and mission but how, and if, they should compete in global investment markets.”