Some 42% of defined contribution (DC) trustees believe that their investment strategies are ‘less sophisticated’ than those used by defined benefit (DB) schemes, according to a Hymans Robertson survey.
According to the consultancy, this is because DB schemes more commonly invest in unlisted assets such as property, infrastructure, and private equity. Due to the illiquid nature of these investments, it is difficult to get exposure to these assets in DC due to the daily dealing requirement.
Of the total pool of respondents that took part in the survey, which was based on an Opium survey of 100 DC trustees in January, 44% said DC investment strategies were about the same as DB with regards to levels of sophistication, while 14% said DC was more sophisticated.
The respondents that thought DC strategies were less sophisticated were then asked further questions to assess how long they thought it would take DC to catch up. Some 40% of those said DC strategies would never catch up with DB.
Just over a quarter of the same respondents said DC would catch up within the next five years, while 24% said it would catch up within the next 10 years. One in 10 said it would take more than 10 years for DC to catch up with DB.
The consultancy further broke the same results down by size of scheme assets. Generally, trustees managing DC schemes with assets larger than £100m were more optimistic than those managing DC schemes with assets of £50 to £100m.
Some 37% of trustees with assets greater than £100m said DC investment strategies would catch up with DB within the next five years, while this was the case for just 17% of trustees of schemes with assets between £50m to £100m.
However, 37% of trustees managing schemes with assets of £50m to £100m said DC would catch up with DB within the next 10 years compared to 16% of trustees managing schemes with assets above £100m.
The results elsewhere were more equally weighted – as 9% of trustees managing schemes with assets of £50m to £100m said it would take more than 10 years, and 37% said it would never catch up. This compared to 11% of those with assets above £100m who said it would take more than 10 years, and 43% who said DC would never catch up.
Commenting on the results, Hymans Robertson head of DC investments Raj Shah said it is difficult to ignore how much the DC investment landscape has evolved in the three years since pension freedoms were introduced.
“The sheer scale of assets enjoyed by DB schemes provides them with greater scope for sophistication and innovation, so much so that even the largest DC trust schemes that exist today would struggle to enter into the same investments.
“Despite this, I wasn’t surprised to see greater optimism amongst those trustees managing larger DC schemes than those working with smaller schemes. Schemes with less than £100m in assets are likely to struggle adopting more sophisticated strategies as they will be unable to receive the benefits of scale enjoyed by those with larger pools of assets.
“Thankfully, the DC evolution is not showing any signs of slowing down and I can certainly see a light at the end of the tunnel. As long as the scale of assets in DC continues to grow and access to alternative asset classes widens, then sophistication in DC investment will improve.”
He concluded that while price and contribution to risk-adjusted return will still be the major factors to consider when selecting an asset class, it is refreshing to see that DC product development is “steadily gaining traction”.