To leave no one behind, defined contribution pension plans must adapt and innovate. That’s the message delivered by Daniel Morris, portfolio solutions manager with Schroder Investment Management Ltd., during his session at Benefits Canada’s 2017 Defined Contribution Plan Summit.
A combination of contributions and return on investments determine the end result of plan savings, and it’s a given that some members achieve better outcomes than others, said Morris. “A balanced portfolio from the last 30 years looks pretty good, and a lot of people are above the threshold level for retirement savings. But if we look at future returns, outcomes are likely to be significantly worse than historically, and less people will be above the threshold,” he said.
“We need to think about those left behind and aim to achieve a minimum income level,” he added.
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One way plans have adapted is through target-date funds with a glide path using age as a factor. Morris, however, suggested going further. “Think about the market environment we are in. In the past 10 years, returns have flipped around, with high-risk equities not giving the return expected while low-risk bonds have. So how can we allocate and genuinely be dynamic and adaptive to the environment we are in?”
Being more dynamic throughout the life cycle can break down some of the barriers around age and current asset allocations. “This gives you a certain dynamic range in the early stage and another dynamic range later and another dynamic range finally,” said Morris. “You have different assets in each of those ranges at times and you want to be more defensive closer to retirement. But having more flexibility means you can move away from that age-dependent life cycle in target funds set up.”
When it comes to innovation, although everyone wants to get higher returns, nobody wants the risk that goes with them, said Morris. “Risk management reduces return expectation, but if we can bring investment capabilities together and combine investments in a complementary way, we can get more people over the threshold level.”
Read more stories from the DC Plan Summit