FTSE Group has launched an index series that measures the value of default pension plans for members of defined contribution (DC) schemes.
Rather than just measure the underlying performance of funds, the FTSE benchmark series measures the total value added to default pension funds by investment strategy design and manager implementation.
DC pension scheme members are funneled into default plans usually if they do not select a self-service option when they join a scheme. Default plans use a ‘glide path’ approach that moves the saver out of riskier growth assets, and into less risky income assets, as the member moves closer to retirement.
FTSE says the methodology can be used to create, “possibly for the first time”, custom benchmarks for any given DC default strategy glide path.
Developed in conjunction with investment research and advisory firm, Elston Consulting, the series represents the performance over time of a two-asset portfolio that moves away from growth assets towards income assets, and is measured for particular groups of savers, defined by their expected retirement date.
A variety of risk preferences in DC default design are also represented, through three index groups reflecting different equity allocations at the outset: the FTSE UK DC 100% Standard Benchmark, FTSE UK DC 80% Standard Benchmark and FTSE UK DC 60% Standard Benchmark.
The product has been welcomed in light of automatic pensions enrolment in the UK, which could create nine million new DC savers according to government estimates.
Duncan Buchanan, president of the Society of Pension Professionals, says: “With DC plans, as the member’s benefits are directly linked to investment performance, it is important that performance can be tracked accurately and benchmarked. Automatic enrolment has been designed to encourage a savings culture and the ability for members to measure the performance of their pension savings in a transparent manner is key to promoting this culture.”
Mark Makepeace, chief executive officer at FTSE Group, says FTSE’s new series promotes transparency and robust governance as more UK schemes transition to a DC model.
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