Defining ambition in default systems: Aberdeen

Defined ambition investment strategies could be a better way to approach default funds, according to Anne Richards, chief investment officer, Aberdeen Asset Management (Europe).

Richards said defined ambition strategies included some element of risk-sharing which gave members "visibility", and also moved towards resolving a member's competing, and sometimes mutually exclusive, demands for simplicity, affordability, reliability and predictability.

Over half of workers chose to put their savings into a pension with lower returns if they had a guaranteed minimum income in retirement, she said.

Richards said UK trustees were currently discussing the ambition concept, which had three forms, although a lot of issues still needed clarification, including a response from the regulator.

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William Morris in the UK employs a cash-balance scheme where the employer matches the employees' contributions with a guarantee that the fund will grow at least in line with inflation, according to Richards.

"The client doesn't know the value of the pension itself, but does know the minimum value of the pot in retirement," she said.

Richards also cited deferred benefit schemes as a form of defined ambition, as employees knew what they would get although the release date was variable.

She said the third product had no guarantees but was described to members in terms of the ranges they sat in, which narrowed as retirement grew nearer.

Higher governance costs and the complexity of a hybrid scheme were the only drawbacks, she said.

"Nonetheless it is a step forward in terms of thinking about what we can do to address the bafflement that some people have in terms of understanding the link between the size of their pot and the size of their savings and the pot that they'll actually get in retirement," she said. 

Richards said that although lifecycle products had some advantages, they were flawed as they assumed risk tolerance and asset allocations based on a member's age, which may not actually suit the individual member.

"An asset allocation model based purely on an investor's age misses the point - that young people should be heavy in stocks and older people should be heavy in bonds doesn't fit how investors actually act," she said.