The new FTSE UK DC Benchmark index is equipped to deal with future changes of defined contribution pension schemes.

Speaking at a roundtable on the need for a DC benchmark at The London Stock Exchange on 29 October, Elston Consulting MD Henry Cobbe said the current changes to pensions will not affect the benchmark.

He commented the budget has not changed the objective of wanting a sustainable income. Currently the changes affect what people do with the outcomes of a pension pot such as taking a lump sum, buying an annuity or a drawdown. However, the benchmark will be used to assist pension schemes in achieving the outcomes.

“Our liability is can we give people a sustainable income in retirement that gives them the quality of life, that’s not an investment that’s an outcome” he said.

“What we’ve done is effectively set out the groundwork of how to calculate benchmarks, capturing that shift in asset classes, if people then choose to populate that with a different glide path that would be a custom benchmark” he added.

Cobbe explained the key to keeping the benchmark up to date is industry dialogue, which helped in the development of the initial indices. “Dialogue will continue to make sure that it’s always suitable and is serving a purpose and that it’s actually useful for trustees and decision makers” he said.

FTSE director of business development Jennie Austin commented that if in five to ten years time there has been a change that affects how the glide path is approached, such as a standardisation of people retiring but still wanting a to have equity left, then FTSE has the ability to enhance the standard index series.

“In our business we know quite quickly where something needs to be standard, we’ve been asked many times for the same index on a custom basis and that’s where we know this custom index becomes a standard index, so I think it will become self-apparent when changes come in the future” she added.

Launched at the beginning of October 2014, the FTSE UK DC Benchmark consists of three standard indices that reflect differing risk preferences in equity allocations. The standard indexes are restricted to two major asset classes, equity and fixed income with de-risking over a 20 year time frame. Custom benchmarks can also be created.

“Had we made it much more complex or had we started with hundreds of indices it would have made it a lot more difficult to actually adopt because you would have to do the analysis of which one you want to use yourself” Austin concluded.

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