“If you create a more complex model there is a risk it starts to be considered a strategy that people would look to follow,” adds Cobbe, “and that is not what we wanted to do. It can be adapted in the future as the pension industry changes.”
Punter Southall senior DC consultant David Ferris believes a generic benchmark is important for DC, but he stresses the importance of trustees deciding their investment and benchmark objectives upfront. Without this, he says, there is no way of knowing what they are measuring against.
One common benchmark, he adds, is an inflation- plus strategy because many members will be judging what they are investing in against cash in the short term and will wish to see swings in volatility dampened.
“We have two clients going down the inflation-plus route because they are recognising they want to know members are achieving a real return and employees will not necessarily look at a FTSE index and translate that into the real world,” he says.
Elsewhere, Ferris believes hybrid benchmarks will become more popular as people move away from annuities when the radical at-retirement reforms are introduced in April. In terms of how such hybrids might look, Ferris says they could comprise a combination of cash for capital preservation, CPI growth and an annuity hedge.
“What you can do over the next three years is look at what people are actually doing at retirement and once you have some hard data you can then see which direction to go in,” says Ferris. “You can then have a cash or annuity and drawdown glidepath sat beneath that as well.”
Meanwhile, JP Morgan Asset Management ( JPMAM) UK DC associate Annabel Duncan also welcomes the neutral index series as an effective tool for enabling trustees to compare their own default to the market.
However, Duncan worries that some trustees carry the “DB mentality” across to DC and in doing so restrict their view to just investment performance at the expense of creating sufficient income replacement at retirement. Broadly speaking, JPMAM assumes a target replacement of 70% of which it anticipates 15% coming from the state and 55% from a DC pot.
“The real measure is whether members are on track to hit a certain income replacement or not. The indices are just a step on that road,” says Duncan.
She adds: “So how you build your glidepath isn’t just looking at investment returns for particular asset classes, it is looking and saying ‘would that get as many members as possible to that income replacement level?’”
Industry figures welcome a neutral performance benchmark in DC as a good way for trustees to measure the performance of an off-the-shelf default or to see the value gained, or lost, by adding other asset classes.
However, to get the most out of their DC scheme trustees must set clear objectives upfront, including deciding on a bespoke benchmark that best suits members’ needs.