LONDON — U.K.-based consultants and money managers are applying liability-driven investing principles to defined contribution plans.
If successful, this approach could revolutionize so far humdrum DC investment strategies that have focused largely on conventional bond and equity investing through lifestyle funds.
Industry sources say liability-driven and target-return-driven investing are new concepts for defined contribution plans and could attract interest in other large markets, including the United States.
A key reason behind the move is that the number of individuals in U.K. private-sector defined contribution plans is outpacing those in defined benefit schemes. By the end of 2005 there were roughly 4.5 million members of occupational DC pension plans in the United Kingdom, according to Andy Cheseldine, a senior consultant at Hewitt Associates, London. This compares with around 3.2 million people in defined benefit plans at the same time, he said.
While the estimated £400 billion ($747.6 billion) in defined contribution assets at year-end 2005 is dwarfed by the £800 billion in defined benefit plan assets, the rising number of participants means new cash flows will increasingly be directed to defined contribution plans.
In anticipation of this broad shift, firms such as Merrill Lynch Investment Managers, London; Hewitt Associates; Watson Wyatt Worldwide, Reigate, England; and Schroders PLC, London, are seeking ways for defined contribution plan executives to make more efficient use of participant contributions.