PLSA IC 19: Diversification in default pension funds 'not enough'

Diversification is “not enough” on its own for a default DC pension investment strategy to provide a comfortable retirement for its members, according to State Street Global Advisors senior investment manager, Mehvish Ayub.

Speaking at the PLSA 2019 Investment Conference, Ayub stated that she believed there were other tools that can be explored to create good outcomes for DC scheme members in default strategies.

She explained: “In this stage of the economic cycle and the type of geopolitical risks we have seen come through in 2018 I don't believe it [diversification] is enough.

“There needs to be a consideration of many of the tools as one could consider in order to protect yourself from significant market events.”

Ayub argued that, along with diversification, it was important to have a “robust strategic asset allocation” in order to minimise risk.

She continued: “In the context of a particular design such as target date funds, its important to think about what kind of strategic asset allocation you would have which is relevant for different cohorts.”

During her presentation, Ayub also highlighted that there was still a place in default DC scheme investment strategies for dynamic asset allocation, despite a lack of confidence amongst the industry.

She believed that there has been “a little bit of a loss of faith” in dynamic asset allocation but that “it still adds value in certain investment processes”, where it is easier to adapt to a changing market environment and therefore protect members against significant losses.

Finally, she discussed how volatility control mechanisms, specifically target volatility, could help minimise risk for savers.

Ayub concluded: “Rather than targeting a particular return, you are targeting a level of volatility, and what that essentially does is protect against the most significant downturns, but you do remain largely invested.”

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