workplace-four-pointed-arrowThe one inescapable thing

There are many variable factors that will have an impact on the level of savings a member can build up in their DC pension pot – contribution amounts, length of time saved, and charges deducted.

But inescapable, and potentially highly valuable, is the impact of investment performance.

In addition to carrying out a full review of a scheme’s default investment strategy at least every three years, the guidance issued by the Department for Work and Pensions (DWP) in 2011 outlined that the performance of the funds within the default option should also be checked informally at regular intervals throughout the year.

This can be done in isolation, but is commonly wrapped up into a governance process providing a structure to monitor and measure this important feature of pension provision.

The performance of default options can vary wildly and, in the current economic and political environment, it is essential to maintain a close understanding of the performance of your members’ savings in line both with the market and the stated objectives. It must also be remembered that investment returns only tell part of the story and that the amount of risk taken to achieve those returns must also always be considered.

Pension scheme investments have a long time horizon (40 years or more for those just starting in the workplace) but ongoing monitoring will help identify any issues early and keep the focus on achieving good member outcomes. This also helps to ensure the pension scheme is a valued benefit, rather than being criticised by employees who have seen poor investment returns. Our view is that the best practice approach for employers is to regularly (at least annually) monitor the default investment strategy.

Employers should consider:

  • the performance of the component funds over both short and longer term time horizons, comparing it to the funds’ objectives and their peers 
     
  • the volatility (a measure of risk) of the funds to ensure they are not taking too much or too little risk compared to their objectives.

Finally, there may well be members who have the opportunity to choose their own investments away from the default option. While it remains the prerogative of the individual to make a choice that they feel may be better suited to their own attitude to risk and long-term needs, there is still support that can be provided. At the least, communication can be issued reminding members of the importance of reviewing their investment decisions, whether that is the decision to remain in the default option or to assess the success of any alternative selections that have been made.

If you don't already monitor the investment performance of your scheme investment strategy you may wish to consider doing so, particularly given the current uncertainty in investment markets.

If you'd like to discuss how we can assist you in monitoring investments through our clear and easy to understand investment governance process, please contact our team to find out more about the services we can provide in this important area.

 

Posted by Richard Guy

Topics: Pensions, Bristol, investment

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