ADVERTISING FEATURE
As revolution replaces evolution in DC what are the
implications for default strategies
Craig Nowrie, Multi Asset Client Portfolio Manager Threadneedle Investments
2015 will be a year of change for all Defined Contribution
(DC) pension scheme arrangements in the UK. In March
2014, the UK government made two ground-breaking
announcements in quick succession.
First, Chancellor George Osborne announced that from
this April retiring pension scheme members from age 55
will longer be compelled to purchase annuities. This was
followed by Pension Minister Steve Webb announcing that
a cap on auto enrolment DC default strategies’ charges
of 0.75% per annum effective from this April, noting that
“Pension savers have paid too much, for too long.”
These two conundrums, the ending of the compulsory
purchase of annuities and the new charge cap, have shaken
the DC market to its core. While it is not known how
pension schemes will react, we at Threadneedle have been
proactive in devising innovative solutions that will meet
the prospective needs of pensioners while future proofing
what we anticipate will be seen as the key default strategy
within Threadneedle.
We believe our Global Multi Asset Income strategy, which
was designed with these new retirement freedoms in mind,
meets the post annuity conundrum for pension schemes in
this post annuity world.
It is, however, arguably the Pension Minister’s “An end to
rip-off pensions” legislation that has the most significant
impact on current DC investments.
The UK DC pension market is one of the fastest growing
pension markets in the developed world, and over 80% of
UK DC investments being in the default strategy. Thus, the
charge cap will have a significant impact on many schemes
and employers.
Some trustees may believe the reform will not affect them
because their fund management charge is under 0.75% per
annum. However, the DC charge cap does not just include
a fund manager’s annual management charge, or even
the Ongoing Charges Figure (OCF), but also incorporates
administration fees, fees to professional advisors (pension
consultants, lawyers, investment consultants etc), platform
fees, member communication… The list goes on.
With all of these additional charges to be considered, we
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believe that schemes should be looking for their default
strategy to have an OCF of around 0.50% per annum,
which is significantly lower than that of many multi asset
funds, but above the level charged by passive equity
strategies. That said, the setting of this default option
needs to take account of the DWP’s guidance on how
default strategies should be designed, incorporating the
likely scheme membership profile and following the DWP’s
stated standards on Objective; Suitability; Affordability and
Managing Risk – asset allocation and investment strategy.
We have watched with interest as our peers have recreated
their existing multi asset solution to fit the new DC market.
This invariably means diluting their core multi asset offering
by replacing the underlying actively managed funds with
passive funds. Active management is at the core of what
Threadneedle do. We are solely an active investment
manager with over 40% of our assets under management
in active asset allocation mandates. Given our heritage and
our long-held belief that the focus should be on value for
money and not cost per se, we do not want to dilute our
DC fund offerings and our active approach simply to meet
this new default charge cap. We have therefore looked at
our key multi asset offerings for the DC market and priced
them accordingly. Importantly for any investor, our key DC
offering is also our key Defined Benefit offering.
By formulating a view on the changing landscape of the
UK pensions market and demonstrating our commitment
to the DC market, our key multi asset offerings are priced
at 0.50% per annum at the Ongoing Charges Figure (OCF)
level. Crucially, we are able to do this while retaining our
active asset allocation and active management of the
underlying strategies.
To discuss Threadneedle’s property capabilities visit us
on stand 1.
Craig Nowrie, Multi Asset Client
Portfolio Manager Threadneedle
Investments
3/6/15 1:39 PM