AB answers some of the big questions in DC and looks at how TDFs can help improve outcomes for members.
1. Could your DC pension scheme be a better fit for your members?
Alignment to member needs
DC pension default options are crucial to most members' standard of life in retirement, but are they really working as effectively as they could? As recent PPI research highlights, aligning the investment objectives with the needs of the members is paramount because the default strategy should reflect the circumstances of the members to the fullest extent possible. A TDF default solution, where each age cohort of your membership invests in a fund specifically designed for their expected window for retirement, can offer both the best fit and the most flexible options for customisation.
The best solutions reflect how members actually live their lives and make their decisions. Our research consistently shows that members want flexibility in timing their retirement, and in deciding how to exercise their pension freedoms of choice. That's a world away from conventional glide path design, which typically funnels members down separate annuity, drawdown or cash routes before they are truly ready to make up their minds. So that's why our TDFs feature glide paths designed to keep members' options open as they approach retirement.
2. How can you measure value for money?
Robust data are the key
Value for money (VFM) is widely recognised as a defining characteristic of a good default solution. Put simply, VFM makes sure members keep more of what they save. But how can you measure it? Essentially, VFM is a function of performance, cost and risk. If you can measure those factors, then you can start to gauge VFM. In traditional lifestyle approaches, which feature separate holdings for each member and multiple switches over time, so many components go unmeasured. By contrast, a TDF approach provides each member with a single fund for their career lifetime. That means we can provide transparent reporting on performance, cost and risk at the scheme level, and can even identify costs and charges at the individual member level. And when we compare AB TDFs with traditional approaches, clients tell us they bring operational savings of around 75% of administration hours.
3. Who is responsible for performance?
Accountability is vital
In any organisation or project, accountability is key. But in traditional lifestyle approaches, there are often problems in terms of clear objectives, clear monitoring and clear roles. For instance, if the trustees have set the asset strategy, and there is no mechanism in place to measure the default strategy's overall performance (not just the performance of the individual funds used within the default), who is actually truly accountable for the members' investment outcome? These problems disappear with TDFs. Each member is invested in a professionally managed fund with clear objectives and clear metrics. For improved clarity in governance, AB TDFs use a multi-lens approach, using agreed comparators over short-, medium- and long-term horizons to manage the overall default strategy through time. That way, there is no confusion, and clients can readily hold us to account for the overall outcome.
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