A Lesson for US Defined Contribution | Chief Investment Officer

US defined contribution (DC) funds should look to the UK for inspiration when constructing a sustainable retirement model, according to Russell Investments.

Bob Collie, chief research strategist at the firm, argued in a recent blog post that work by the National Employment Savings Trust (NEST) could pave the way for an improved post-retirement funding model.

“Even shifting the mindset from one of ‘How much do I have saved in my retirement plan?’ to ‘How much lifetime income will that provide?’ would be an important step forward.” —Bob Collie, RussellCiting NEST’s paper “The future of retirement: a retirement income blueprint for NEST’s members”, Collie said the “building blocks” approach taken by the UK fund should be considered by US peers. These building blocks are income drawdown—the usual focus of an individual’s savings—a cash lump sum to fund unexpected cash needs, and a “later life retirement income” fund.

NEST was set up by the UK government as part of its efforts to improve pension savings. It is now one of the country’s leading providers of auto-enrolment pensions. CIO Mark Fawcett collected an Innovation Award for Best Defined Contribution Fund at CIO Europe’s awards ceremony in May.

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Collie argued that the “later life retirement income” element “directly attacks one of the toughest elements of the retirement planning challenge: how to handle longevity risk”.

NEST’s model proposes a post-85 income pot, effectively acting as an insurance fund for members that live longer than average. “Without such an insurance policy, the flexibility of the drawdown fund is constrained because money needs to be set aside against the possibility of a long life,” Collie said.

“It may offer an answer to the problem of where annuities fit,” Collie added. “In theory, retirees should prefer to have a large part of their assets in the form of a lifetime income—but in practice, purchasing an annuity is a difficult decision for a number of reasons.”

The chief strategist also argued that US pensions could benefit from explicitly separating a cash lump sum pool to help pay for individuals’ unexpected needs, and advocated a change in the mindset from savers towards their pension savings.

“Even shifting the mindset from one of ‘How much do I have saved in my retirement plan?’ to ‘How much lifetime income will that provide?’ would be an important step forward,” Collie added.

Read Bob Collie’s full blog post, “Lifetime retirement income: A new framework from the UK”.

Michael O'Higgins LLPP Michael O’Higgins, chair, LLPPThe public pensions of London and Lancashire have appointed a former regulator to chair their £10 billion ($15 billion) asset management partnership.

Michael O’Higgins, former chair of the UK’s Pensions Regulator, is the first major appointment for the London and Lancashire Pensions Partnership (LLPP), which aims to launch in April 2016.

Alongside O’Higgins will be three non-executive directors, to be announced in the coming weeks, as well as Skip McMullan, representing the London Pension Fund Authority (LPFA), and David Borrow, deputy leader of Lancashire County Council.

Sir Merrick Cockell, chair of the LPFA, said the appointment of the “highly respected” O’Higgins was “a real testament to what we are trying to achieve”.

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O’Higgins has held a number of top board positions for UK organizations, including chair of the Audit Commission and a non-executive director at HM Treasury. He currently chairs the National Health Service Confederation and the remuneration committee of Network Rail, which manages and maintains the UK’s railways. He has a degree in economics from Trinity College, Dublin, and a master’s degree in social policy from the London School of Economics.

O’Higgins described the collaboration between Lancashire County Pension Fund and the LPFA as an “ambitious project that could completely change the face of the public sector pension industry”.

“I applied for this role because I believe what Lancashire and London are doing with this partnership is exactly what should happen across local government, and indeed the wider pension sector, to help secure better benefits for members,” O’Higgins added.

The LLPP is one of the most advanced public pension collaborations in the UK, alongside a project to pool common mandates among London’s pension funds. The country’s government has announced radical plans to push through such collaboration projects for all funds, with Chancellor George Osborne last week declaring that he wanted the 89 pensions to be merged into six “British Wealth Funds”, creating the scale to invest effectively in infrastructure.