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Outcome–Oriented DC Solutions

Pension Section News – Number 64 | May 2007

Outcome–Oriented DC Solutions

The dynamic LDI approach for DB plans is an example of an outcome-oriented approach to DB investing. Instead of focusing on market indices, the focus is on achieving a specific real-world outcome for the DB plan. A similar trend towards an outcome orientation is evident in DC plans in Europe (and elsewhere), as well as in the individual investment area.

In the DC world, outcome-oriented investments include:

  • Principal protected investments
  • Risk-based lifestyle funds
  • Target-date lifecycle funds
  • Inflation-indexed investments

According to the McKinsey & Company study mentioned earlier, the fastest growing of these product segments over the last 10 years are the target-date lifecycle funds and the inflation indexed investments. ABN AMRO Asset Management has noted that combinations of outcome-oriented features are also proving popular, such as target-date lifecycle funds that include guarantee provisions.

As more and more of the assets of DC plans (and individual retirement savings) concentrate in the hands of members who are age 55 or more, income generation will assume an ever-greater importance.

In the new market environment that is emerging in Europe, and in North America as well, there will be a great demand for investment solutions that capture the future needs of DC members and individual investors. These include

  • Return (to secure a future lifestyle and offset longevity risk)
  • Security (to ensure at least a minimum lifestyle and provide peace of mind) and
  • Flexibility (to adapt to changes in life situation).

As DC plans evolve to meet these needs, a trend is already becoming visible in some parts of the world that will likely occur in North America as well. Over time, plan providers (whether sponsors themselves or the service providers such as insurance companies) will move to define a carefully selected set of investment options and managers rather than a fund supermarket. This trend is already well advanced in Australia and is increasingly visible elsewhere.

Summary

European pension funds are grappling with similar issues to those facing American and Canadian plans. Proposed solutions include strengthening the DB model, and switching from DB to DC plans. The solution chosen in a specific country seems to depend at least in part on cultural factors. In either case a move towards outcome-oriented investment solutions will intensify.


Frank Goasguen is global head of institutional clients at ABN AMRO Asset Management.