When looking at the challenges facing the UK defined contribution (DC) market, it’s sometimes too easy for UK-domiciled investors to become fixated on the UK’s particular situation and to fail to notice the experience of other DC markets around the globe. While the models in Australia and the US are certainly different, for example, they both have features that may be beneficial.
If we look at Australia, the long tenure of the superannuation arrangements means that retirement savings are embedded into mainstream society. Owing to the sheer scale of the ‘super’ plans, governance and investment sophistication are markedly more pronounced than is the norm in the UK DC market. Of course, the role of industry-wide plans alongside mass consolidation gives the necessary scale, and while this remains a pipe dream for the UK, perhaps the growth in the master-trust segment does mean that we may see more consolidation than in the past.
The benefits of this scale can be seen in Australian plans having their own specific bespoke funds, with their investment philosophies reflected in the mix of active and passive styles. These may incorporate environmental, social and governance (ESG) factors (maybe excluding tobacco stocks based on the plan’s beliefs), or indeed the holy grail of UK DC – active use of alternatives. The size of the assets, combined with investment governance resource, allows plans effectively to manage illiquid exposure and risk.
The other compelling aspect of the super funds is the transparency of costs and performance. Each plan publicises its performance (they all have different asset allocation and managers), as well as their ongoing costs. In a world where members have the flexibility to move plan, one sure way of driving efficiency, competitiveness and ‘value for money’ is transparency.
Turning to the US market, the Callan Institute’s recent 2017 Defined Contribution Trends survey shows a fascinating picture that reflects many issues similar to those we see in the UK. A focus on driving down plan fees was signalled as the most important aspect of improving the fiduciary position. The impact of changing legislation was also highlighted, with nearly 40% of respondents stating they were unsure as to how Department of Labor regulatory changes would affect them.
In terms of US trends that the UK could learn from, some 63% of plans which expressed an opinion said they automatically escalate member contributions up to a cap of 29.5% (with a median rate of 15%, up from a median of 10% in 2010). It’s also interesting to note that some 84% of plans in the survey offer some form of investment guidance or advisory service. Finally, the top three priorities for US DC plans were fees, compliance and participant education. So, irrespective of where you are in the world, the challenges faced by DC plans are pretty consistent, and, from a UK perspective, looking both to the Asia-Pacific region and the US can be helpful when seeking different solutions.
Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those countries or sectors.