CA Summit – Dynamic risk defaults ‘best practice’

Existing lifestyling models are not suitable for auto enrolment and need some form of dynamic risk approach, such as a target date or diversified growth fund strategy, panellists said at the Corporate Adviser Summit.

In a panel debate on investment strategies for DC schemes, Henry Cobbe, BirthStar executive director, said target date and DGFs could provide the rotation, diversification and flexibility needed in default funds. But Miles Buckinghamshire, director BESTrustees, doubted whether default funds would achieve their objectives.

Mark Fawcett, Nest chief investment officer, said:  “Nest’s target date funds reflect best practice by diversifying and managing risk. But there are good and bad target date funds and it is important to use the flexibility they allow. Scale is also vital to get charges down to the single basis points that are available in the US. “

Cobbe called for a ‘default 5.0’ fund which made daily tactical asset allocation decisions to reduce the dispersion of outcomes, although that might require massive consolidation into master trusts.

Damian Stancombe, director P-Solve, said many default funds would need be to re-visited as auto enrolment was “a pay roll process with a default scheme” and that Nest could be the benchmark default scheme. “You have to take risk to get that 3%+ return,” he said.

Speaking from the floor, Roy Porter, Nest assistant director distribution, said that Nest was already collaborating with a number of insurance companies to help them “construct investment solutions which work well for the member and which are complementary to Nest’s target date fund solution.”