Investment Decisions

While trustees of defined benefit (DB) schemes are increasing their focus on investments, many trustees of defined contribution (DC) schemes believe that their responsibility is limited to offering a range of funds so that each individual member can make his or her own investment decisions.

Choice

While ‘choice’ can be a positive attribute, in most cases it would be hard to argue that choice without guidance is in the interests of the beneficiaries.

Most people, including typical pension fund members, do not have the expertise needed to make informed investment decisions.  This was recognised by the introduction of the Financial Services Act 1986, which offers far greater protection to consumers of investment products than buyers of typical consumer goods.

Suitable Investment

For most people, their pension is their second most important asset after their house, so it is vital that pension monies are invested in suitable assets.  This is unlikely to happen if the choice of investments is left entirely to each individual member, although it would be impractical and prohibitively expensive to provide individual investment advice for every member.

Default Options

The most obvious solution is to offer default investment options.  Given the significance of the investment strategy to the financial well-being of the members in retirement, the choice of default strategy or strategies is of paramount importance. Where default options are offered, they tend to be very popular.

Trustees of DC schemes should give greater attention to developing a suitable default strategy

Failed Investment Strategy

If the investment strategy of a DB scheme ‘fails’ (however that is defined), the sponsoring company can often make good any shortfall and can do this over several years.  If the investment strategy of an individual’s DC pension ‘fails’, then the member is likely to face hardship in retirement.

Suitable Investment Strategies

This highlights the need for trustees of DC schemes to give significant attention to providing the most suitable investment strategies for the members of their DC scheme.  This attention has, traditionally, focused on developing a suitable default strategy.  With the many recent changes in relation to the choices that DC members can exercise, selecting a suitable default strategy has become more complex and the options provided for members need to be more carefully crafted.