The future of DC is in defining ‘good outcomes’

Aon believes the UK pension industry needs to have a clearer definition of what it means by ‘good outcomes’ for members of pension schemes, if investment strategies are to fulfil their aims.

The concept of a ‘good outcome’ might be recognised in the sector, but the lack of a clear definition means that investment strategies cannot be fully aligned to a clear purpose.

Chris Inman, head of DC investment advisory at Aon, said: “Saving for retirement has never been easy but the introduction of Freedom and Choice introduced new variables for people to deal with – and which the industry is still grappling with. We believe that an individualised glidepath can be constructed for each DC saver that targets a sustainable level of retirement saving using risk-rated building blocks. Key to that, is not only a clear definition of what a good outcome looks like but also avoiding the common mistake present in traditional DC lifestyling - which is de-risking too early and missing out on growth opportunities.”

Aon is critical of the ‘rigidity’ in traditional lifestyling where it could force members to disinvest from assets at inopportune times. For example, it could have forced a sell out of equities in February 2009 - just before the market bounce back - simply because the DC saver had become a little older. An individualised approach allows members to 'bank' returns they have accumulated while continuing to participate in market growth when required. The company reiterates that delivering stable returns above inflation and ensuring capital preservation are the two key investment objectives of a default strategy for those nearing the point of accessing their DC savings, and that any current approaches which combine cash and UK fixed income now risk significant capital losses.

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