The investment strategy of the government-backed National Employment Savings Trust (NEST) scheme is already inspiring major defined contribution (DC) providers in the UK to review their own plans, claims asset manager AllianceBernstein.

According to Tim Banks, director of sales and client relations at AllianceBernstein's DC investment division, it is surprising that so many providers are already asking their consultants to review investment plans: "Once NEST's first results are published they realise that a lot of questions are going to be asked by members and trustees comparing their own scheme's performance."

Banks points to NEST's idea of evolving the practice of lifestyling as being the major catalyst for other providers to review their DC plans. Based on demographic research of their likely savers, NEST decided that as well as 'lifestyling' assets away from risky equities into secure low-risk holdings close to retirement age, it is to start young savers on portfolios dominated by safe assets such as bonds.

The new catch-all fund then aims to give savers greater equity exposure a few years later when it is hoped they have already developed a taste for pension saving.

AllianceBernstein also advocates that demographic assessments should inform risk choices, but themselves offer a more return-seeking active style of DC management. Banks argued "there is a need to overcome the inertia of insurance companies failing to pay attention to the investment needs of savers already signed up to a contract-based DC scheme, the so-called 'governance vacuum' ".

Flexible target-date funds, which group together savers due to retire within the same three year period but are responsive to market conditions, are AllianceBernstein's headline contribution to the growing debate on DC investment strategies. The managers are due to launch an 'off-the-shelf' target-date fund product later this year that will allow insurance companies to offer a tailored investment approach without the difficulty of adjusting the approach themselves with the bureaucratic hassle of informing members about changes.

AllianceBernstein is hoping to provide DC schemes principally for larger enterprises than the small companies that NEST's offering is tailored too, with Banks saying: "We are delighted that NEST is offering this good solution to employers who otherwise would find pension provision difficult. But if a larger employer is fulfilling their fiduciary duty it will be difficult to choose NEST." 

Emma Douglas, Mercer's head of workplace savings says that "lots of employers and trustees will want to check their pension plans against NEST, which was always going to become an industry benchmark". Douglas, however, sees the auto-enrolment reforms due to be implemented from October 2012 as a more significant reason for employers reviewing DC plans than NEST's novel approach.

Douglas said "it is a very interesting time to be running a DC scheme as pretty much all of our clients will be reviewing their DC provision over the next 18 months. That might be because of worrying what kind of qualifying scheme they will put together for auto-enrolment, or they are looking to offer wider savings options to their employees like ISAs".

She added "schemes may also be looking at their investment options, and considering whether their current arrangements are fit for purpose and offering good member outcomes." Passive equity strategies and automatic life-styling is no longer enough to satisfy everyone in the increasingly enlarged pool of British DC savers, Douglas said, citing Mercer's default DC 'growth fund' which are 50% passive and 50% tied to their in-house diversified growth fund.

Mercer's DC innovation centres around flexible workplace savings in the form of a corporate wrap in collaboration with insurers Zurich, Standard Life and Friends Life. On the subject of target-dated funds Douglas says: "Target dating has been around for a long time, and is very popular in the US, but it really hasn't taken off in the UK to date. It's interesting to consider whether because NEST is using it we will see more UK schemes using it."

In Douglas's view target-dated funds are "probably a very good strategy for NEST's members who are going to have minimal engagement from employers" but she favours a more flexible approach that moves members into a target-dated fund five years prior to retirement "when people are more receptive to take decisions about retirement."

Flexibility around the retirement point is another major focus of industry innovation. For their part, Mercer are offering a choice of fixed-annuity and rising-annuity specific retirement-date funds. "They'll be a whole load of members who won't want to annuities immediately as DC pots get bigger and the last thing they will want is to be transitioned automatically into bonds and cash."

First published: 01.06.2011

dbillingham@wilmington.co.uk