DC: Not as Bad as We Might Think | Chief Investment Officer

(May 28, 2013) – Good news from the land of defined contribution (DC) – large employers are paying an average of 5.1% into their staff’s DC schemes.

Where employers provide the same contribution rate for all members, their contributions average 9.3% of pensionable pay, but it’s far more common for employers to vary their contributions according to how much employees are prepared to pay themselves.

Across the UK’s FTSE 100 employers, the average core employer contribution is 5.1%, with a further 5.1% available for members who take full advantage of matching contributions, taking the total to more than 10%.

The new statistics, unveiled by consultant Towers Watson, also showed that annual management charges were no more than 0.4% of the member’s account if they stayed in the default option, and that where companies automatically enrolled their staff into the DC fund more than 90% stayed in it.

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Interestingly, DC funds which are overseen by trustees, as opposed contract-based funds, tended to have a smaller range of fund choices.

This seems to be a positive, as where fewer options were offered, members were more likely to actively choose their investment options. This echoed recent research on the outcomes of 401(k) funds, which showed that less is more.

Some 67% of contract-based schemes offer more than 50 investment choices, whereas 75% of trust-based schemes offer between five and 15.

Nico Aspinall, head of DC investment at Towers Watson, said: “Sometimes, more choice can mean less choosing. Selecting an option from a long list can appear more daunting. One third of contract-based schemes are now offering a narrower core fund range alongside the full menu in order to combine a manageable choice for most members with greater flexibility for experienced investors.”

Further good news was found when it came to charges levied by the funds on members: 74% of DC funds said that the Annual Management Charge (AMC) in their default investment option was 0.4% or less, a marked increase when compared with the 53% recorded in 2012.

There was little difference in fee levels between trust-based and contract-based funds, overall, the average AMC is 0.33% in trust-based schemes and 0.37% in contract-based schemes.

However, the gap is wider (0.22% and 0.38% respectively) if the comparison is confined to purely passive investments.

The research comes at an interesting juncture for DC in the UK – last week, the Department for Work and Pensions said it would consult in the autumn on whether a charge cap should apply to the default investment option in all DC schemes.

But Towers Watson’s senior consultant Will Aitken said a charge cap may not make much immediate difference for large employers, and risked stifling innovation in investment strategy, given the best ways of balancing risk and return are often more expensive to implement.

One area on which all agree is that defined benefit (DB) has had its day in the UK – 34% of FTSE100 companies now have no employees who will receive DB benefits, including 27% who used to, but have now completely closed their schemes.

While closing to existing members is not yet quite the norm, there is evidence we are proceeding down that path.

“If the pace of hard closure seen in recent years continued, all FTSE100 companies’ schemes would be completely closed within a decade,” said Aitken.

“Bigger than expected deficits and the loss of National Insurance rebates from 2016 may lead more employers to do this sooner rather than later.”

(May 28, 2013) — One of the largest pools of institutional assets has moved a considerable part of its capital away from external asset managers over the last 12 months and increased its internal team.

The Abu Dhabi Investment Authority (ADIA) has brought five percentage points of its considerable assets under the auspices of its in-house investment team, its 2012 annual report has revealed this week. ADIA said at the end of 2012, some 75% of its assets were managed externally, down from approximately 80% a year earlier.

Although the sovereign wealth fund does not disclose its assets, they are estimated to be around $627 billion, making the shift roughly equivalent to $30 billion brought internally.

At the same time, more of the fund’s assets are now managed on an active basis, the report said. At the end of 2012, around 55% were run on index-replicating strategies, down from 60% a year earlier.

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To be able to run all this new money internally, ADIA has increased its headcount by around 10% over the last 12 months from 1,275 at the end of 2011 to around 1,400. The personnel distribution has remained largely the same except for a slight increase in people manning the home office in the United Arab Emirates. The fund announced several high profile hires over the course of the year, including leaders for several asset class units.

Tellingly, the report noted ADIA had formally recognised the important role played by the human resources and other services outside of direct fund management within the institution.

In terms of asset allocation, ADIA’s strategic portfolio has remained largely the same as last year – however, it has trimmed its developed markets holding from a maximum and minimum of 45% and 35% to 42% and 32% respectively.

The fund did not increase its thresholds for emerging markets, but the annual report is clear in its intentions to expand the asset class’s standing in the portfolio.

“ADIA last year conducted a series of high-level, fact-finding missions to key markets around the world,” said ADIA Managing Director Hamed bin Zayed Al Nahyan in the preface to the report. “These included relationship-building meetings with government officials, corporate leaders, trade bodies, financial institutions, think tanks and research analysts, and the media, across Europe and also key growth markets of the future, including India and the tiger economies of South East Asia.”

In 2012, ADIA received approval from the Chinese market regulator to increase its allocation to Chinese equities under the Qualified Foreign Institutional Investor (QFII) scheme from $200 million to $500 million. ADIA said the increase was implemented during the third quarter of the year.

It also appointed fund managers for Latin America.

Fixed income managers may note that the giant investor began installing a new market-leading technology system specifically tailored to ADIA’s needs. “The new system will support the department’s portfolio management and decision-making activities, including risk management and performance attribution, and is due to be fully implemented during 2013 and 2014.”

The fixed income team also began looking at sub-investment grade credit for the first time, the report noted, with allocations made to managers in the second half of the year.

To access the ADIA report, click here.

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