Last year I started to put money into a defined contribution pension scheme that my employer provides. I do not know what I am invested in and I do not know much about how well my investments are doing.
All I know is that a certain sum is taken from my salary every month and I hope (no, I pray) that it is enough to live on when I have silver hair and a Zimmer frame.
Even though I do not have intimate knowledge of my pension fund investments, I do know that I need alpha for the long term.
Take away the uncertainty over tax, benefits and retirement ages that constantly loom over pensions because of government flip-flopping – how well an investment performs is the top concern for a DC investors.
But I suspect, considering the volatility of equity markets in 2011 and thir poor performance for over a decade, that I won’t be able to use the amount I have saved to have a luxurious retirement in a place where the sun shines 300 days of the year.
I, like all DC investors, want my contributions to make consistent steady returns above cash and inflation no matter what is happening in markets – without exceptions.
I suspect that alpha-generating investments are difficult to access for the average DC investor like me. There are many potential solutions for the DC investor, which is a growing proportion of the market due to the gradual death of defined benefit schemes.
Policymakers in Europe have emphasised the individual taking responsibility and they want to use the UCITS wrapper to build investment blocks for pensions.
Alternative UCITS provide access to hedging strategies in a transparent format, but liquidity requirements mean that certain investments have to be excluded. However, perhaps another wrapper or a revision of the UCITS rules for less liquid strategies aimed at DC investors or long-term investors could be developed.
The main problem with pensions in the UK, as well as most parts of Europe, is that policy and decision-makers in governments are making decisions that do not affect them – as they continue to enjoy final salary index-linked pension schemes, so they have pensions that continue to ensure a comfortable retirement.
Poor investment returns, combined with the transfer of wealth from savers to those who borrowed excessively over the last 15 years – developed governments being some of the largest borrowers during the credit boom of the last 15 years - plus quantitative easing and Long Term Refinancing Operations (LTRO) has created a serious moral hazard.
Maybe, instead of squirreling away for my retirement day, I should perhaps do my bit to help the economy another way – and spend, spend, spend! After all, I would be helping stimulate the economy in the interim and at least I would get some short-term pleasure too…