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
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
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
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
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…