Paul Bucksey (left) is chief investment officer of the Smart Pension Master Trust and Nick Groom (right) is head of DC at Natixis Investment Managers
Auto-enrolment (AE) has undeniably been a success. Ten years since its introduction there are now nearly 20 million people participating in a workplace pension. But more needs to be done to ensure savers build a retirement pot which is sufficient to fund their retirement.
At this year's conference, the Pensions and Lifetime Savings Association (PLSA) launched research by the Pensions Policy Institute (PPI) which found that over 50% of savers will fail to meet the retirement income target they need for a comfortable retirement. That is a concerning percentage and one that should not only sound alarm bells, but also generate coordinated action. Schemes, members, and investment managers, alongside the government, have a role to play to ensure better retirement outcomes are secured.
In the context of today's markets, and with the cost-of-living crisis deepening, engaging members properly with their pension savings is critical to ensure that pension savers continue to invest, to secure their financial futures. Natixis IM's recent Millionaire Report found that even high net worth individuals are worried about retirement with six in 10 (58%) of those with over $1m (£870,000) in investable assets believing they will have to work longer than they'd planned to ensure they have enough money for retirement.
But what can schemes and members do to ensure the next generation don't fall short?
Investment managers: Strategies
The recent gilt market crisis and consequential asset sell off has created a sense of nervousness around illiquids in the defined benefit (DB) market. It is important that message doesn't transfer into the defined contribution (DC) market where illiquids play an important role in boosting investment returns over the long term and diversifying portfolios. Pension savers are well-placed to benefit from the characteristics of illiquid investments such as the illiquidity premium, access to alternative asset classes and ESG factors. The government is actively consulting on how to improve access which we are supporting.
As NEST's research found in 2020, members are likely to be more engaged (a win for their own savings and for the investment managers' cashflow to drive improved strategies) if their capital is invested in investments that have a positive impact on the world and are relatable. Unfortunately, the private assets that are most relatable and have positive outcomes, for example investments in natural capital, biodiversity and the energy transition, are almost inaccessible for DC schemes.
To facilitate access for schemes to these types of investment strategies, investment managers in most cases need to develop solutions with integrated liquidity provisions. The investment industry also needs to work more closely with schemes on fee types and must be flexible about what they mean and relate to. To date, a lack of demand for these strategies and a race to the bottom in terms of price across DC schemes has meant there hasn't been the pressure on fund managers to develop improved solutions.
Last year, Natixis IM developed a solution in partnership with Smart Pension to open up the benefits of illiquids to Smart's DC members. The solution ensures the master trust has enough liquidity to meet needs while allowing access to private market credit and enhances the diversification of the default fund to meet members' needs. Such solutions need to be more readily created and marketed across DC schemes' default funds if we are to see improved outcomes, which is increasingly important as we shift away from DB pensions to DC.
Secondly, for the first scheme year that ends after 1 October 2023, trustees and managers of relevant occupational pension schemes, will be required to disclose their full asset allocations of investments from their default funds. And future revisions to their statement of investment principles will have to include specific reference to the trustee's policy on illiquid investments. We believe that schemes should also use age profiles as part of the default asset allocation disclosure to represent the different asset allocation phases in accumulation.
This enhanced transparency will help schemes to better understand how they could improve performance by investing in other asset classes and identify areas that require change. This process of disclosure can also help schemes understand the diversification of their portfolios on a more regular basis, helping them to better smooth out risk from volatile markets, for example.
Schemes: Technology
Looking back over the past ten years, it's clear that the technology around us has changed in ways - and at a speed - we could never have expected or predicted.
In that time, we've become used to doing all kinds of things online, particularly when it comes to our financial lives. This adoption has been accelerated by the Covid pandemic.
It's reasonable to assume that technology will continue to change and empower over the next ten years. Regulation will need to keep up, of course, as will our ambition. For anyone involved with workplace pensions, technological change will continue to make things easier, quicker and more achievable and so they should be advancing their tech capabilities.
Tech can be used to make a scheme more efficient and to engage members. For example, Smart's highly automated proprietary pensions technology drives down pension administration costs, which means that more of the charges paid by members can go towards investment components, such as private markets, infrastructure and impact, which are more expensive than more vanilla passive funds.
It also important to provide pension savers apps and digital tools that can not only simplify decisions for them but also demystify the world of pensions for those who are just starting in the workplace.
We're all only human, after all, and it's all too easy for getting on top of our pensions to be a bit like writing a will or filling in a tax return - tomorrow's job. Add to that the way that pensions are often seen as complex and confusing, and it's understandable that people can put their head in the sand.
Over the next ten years, though, technology can find ways to educate and engage, to communicate the message that the default contribution level of 8% probably isn't going to be enough to ensure a comfortable retirement for many of us.
Nick Groom is head of DC at Natixis Investment Managers and Paul Bucksey is chief investment officer of the Smart Pension Master Trust
