Here is what I posted on another forum (LinkedIn) on Friday, in relation to investment strategies for auto-enrolled pensions:
It is interesting to
read that pension funds, bastions of long-term investing, are resisting UK government threats to force them to invest in 'risky' assets, because fear of short-term volatility trumps their desire for higher long-term returns.
The lunacy of pension investment strategies is well illustrated by 'lifestyle' investing for auto-enrolled (AE) pensions. In aggregate, AE schemes will enjoy positive cash flows for decades, so should invest for the very long-term, yet investment strategies ignore that reality. Instead, asset allocation takes place at individual member level. Contributions for young workers are invested in 'equities' (growth assets) but as they age, funds are transferred to 'bonds' ('safe' assets). At the extreme, retired members who opt for annuities are invested 100% in bonds.
The lemming-like rush to bonds as individual members age (and as their pots get bigger) happens despite the certainty of positive cash flow at scheme level. Madness.
I have proposed that AE assets be invested 100% in equities, to take advantage of the very long investment horizon, and to deal with volatility of short-term returns by the simple expedient of stipulating that individual members transact with the scheme at smoothed values, resulting in volatility levels close to deposit accounts. Everyone gains, because the equity risk premium is captured for the benefit of all: young and old, active and retired. The result is an average 70% uplift in member benefits. The full paper can be found
here.
Despite my proposal winning a major award from the UK actuarial profession, the Irish government refuses to even have it evaluated in advance of implementing auto-enrolment in Ireland. Madness is not confined to sponsors of private sector pension schemes.