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The Actuary The magazine of the Institute & Faculty of Actuaries

DC pensions survey highlights contrast in investment strategy

Two out of three contract-based defined contribution (DC) pension schemes in the FTSE 100 offer 50 or more investment options to members, according to Watson Wyatt’s annual FTSE 100 DC Pension Plan Survey. In contrast, less than 3% of trust-based DC schemes offer 50 or more investment options. In the survey, two out of three trust-based DC schemes in the FTSE 100 offer 10 or fewer investment funds with less than 10% of contract-based schemes doing likewise.

According to Gary Smith of Watson Wyatt: “There is a clear difference in investment strategy between contract-based schemes that continue to offer excessive choice, and trust-based schemes that don’t. Excessive investment choice can really deter joiners as well as lead to members making wrong fund choices and unintentionally taking on inappropriate risks and cost. In addition to exposing their members to these risks, contract-based schemes are adding considerably to their governance burden by offering so many choices.”

According to the survey, over half of FTSE 100 DC pension schemes have over 80% of their membership in the default investment option, down from two thirds in 2007. Over 90% of schemes with a default option offer a lifestyle approach as the default.

“The sheer weight of DC members in lifestyle default funds continues to highlight the importance of getting their design right,” says Smith. “The lifestyle approach continues to be a robust answer to dealing with market turbulence, but if it is badly implemented through an over-simplistic investment design, poor switching mechanisms or excessive cost, then millions of members will be let down.”

According to Watson Wyatt, over a third of FTSE 100 DC schemes now each have over £50m in assets. Smith concludes: “The DC market is now substantial and its societal importance will only grow. With the DC model being forced into the spotlight by the current financial crisis, it cannot be allowed to fail, and continuing investment innovation will be at the heart of that challenge.”