Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697805668838.pdf (Ireland)
Insights Defined Contribution October 2022 DC Investment Strategy in a New World Alistair Byrne, CFA® Head of Retirement Strategy Olivia Kennedy, CFA® Senior Defined Contribution Investment Strategist • Default funds are critical for the success of auto- enrolment plans.

• A key challenge for the implementation of Ireland’s automatic enrolment system will be the investment design and governance of the default strategy.
• Based on overseas experience, we expect the vast majority of scheme members (in excess of 80%)1, to use the default strategy.

• Default investment options need to be suitable for members, based on analysis of membership profiles and retirement behaviour.

• Integration of Environmental, Social and Corporate Governance considerations is becoming increasingly important for managing long-term investment risks.
• Robust, ongoing governance is critical to ensure the suitability of the default over time and achieve good member outcomes.

CFA® and Chartered Financial Analyst® are trademarks of the CFA Institute.
Auto Enrolment Default Design Principles: What We Know So Far After the hurdles that have been faced over recent years, we are pleased to see the auto- enrolment plans set out in the 2019 consultation documents, finally moving forward.2 One key milestone is the design of the investment options, including the default investment strategy.
The final design principles announced by the government last year, set out the following details for investment design:3 Age Appropriate Investment Objectives • Commercial providers will be invited to tender to become a Registered Provider of investment management services.

Up to four Registered Providers will be selected and each will provide three risk graded funds plus a default investment option for members who do not make a choice.
• The default investment option will follow a lifecycle/lifestyle investment approach which will automatically de-risk as members approach retirement.

• The Registered Providers will offer investment products in compliance with standards set by the Central Processing Authority which will include specific ethical/ESG criteria.

• Charges will be capped at 0.5%.

As of 29 March 2022.


As seen in other markets with automatic or mandatory pension scheme participation, it is typical for the majority of members to have their savings invested in the default investment strategy.

This high take up of the default strategy is not a bad thing and typically may lead to better outcomes than individuals making their own detailed investment choices.
Evidence has shown that individuals are prone to behavioural biases such as taking too much/too little risk, failing to update their investment strategy over time or concentrating their portfolios to particular sectors/countries.
These biases can lead to suboptimal outcomes when making complex financial decisions.4 For default investment strategies, which have a multi-decade time horizon, we believe different objectives are applicable depending on how far a member is away from their expected retirement age.
The table below sets out some example objectives for various life stages: Life Stage (age) Qualitative Objective Quantitative Objective (nominal) Growth (pre age 45) Consolidation (45–65) Preservation (65+) Helping members grow their pots and avoiding short-fall risk Providing members with a smoother journey, protecting their pots from market shocks when they are approaching retirement Being robust to the uncertainty that members face at retirement (in terms of what they will do with their retirement savings) 5% 4% 3% The information contained above is for illustrative purposes only.
The default must be suitable for the employees being enrolled in it.

Good practice calls for schemes to analyse the characteristics of their membership and use that information in the design of the default.

Key characteristics include age, gender, wage profile, retirement date, life expectancy, risk tolerance and likely use of assets at retirement.
2 DC Investment Strategy in a New World Setting an Objective for the Preservation Phase The default objectives should take account of how members may access benefits at retirement.

Irish legislation allows for members to purchase an annuity, use income drawdown (via an Approved Retirement Fund), withdraw a cash lump sum, or a combination of the three.

One option would be to have different investment strategies and corresponding objectives tailored to member’s preferred or anticipated retirement benefits.
In practice, members have very little certainty of the choice they will make.

In our New Choices, Big Decisions5 research carried out in the UK over 2015–2020, we found that most members were uncertain about their retirement options and changed their decisions several times as they approached retirement.

In our 2016 Retirement Confidence Monitor,6 42% of Irish savers didn’t know or wouldn’t know how they would access their retirement benefits until they are within two years of their retirement date.
As such, we believe the preservation phase should be robust to the uncertainty that members face at retirement.

In practice, this means having an appropriate blend of growth and defensive asset classes at the point of retirement.

Pension scheme members view it as increasingly important that their funds are invested sustainably.
Within lifecycle strategies, there are three main ways that ESG can be incorporated: 1 Stewardship — Asset stewardship is the engagement with investee companies to seek long-term value and mitigate risks.

2 Exclusion — Exclusion involves removing companies from investment portfolios that do not meet certain minimum ESG criteria.

3 Integration — Emphasising (i.e.

hold a greater proportion of) investments with positive ESG characteristics.
The design principles as set out by the government mention the inclusion of property in some of the risk graded funds.

The inclusion of illiquid assets such as property in the asset allocation of DC pension scheme defaults can provide several advantages that DC savers could benefit from such as diversification, inflation protection, return enhancement and risk mitigation.
However, the proposed cap of 0.5% would allow little scope for substantial allocations to illiquid assets which typically have higher management costs.

In our view, diversification can be effectively achieved via liquid exposures to asset classes such as high yield debt, emerging market debt and infrastructure.

Exposure to alternative asset classes via liquid or illiquid funds may add to overall costs.

However, we believe the CPA should focus on value for money rather than lowest cost.
3 Default Design Features The Default Should Incorporate ESG Diversification via Liquid Alternatives DC Investment Strategy in a New World Default Governance In addition, whilst setting a good default is important in achieving good member outcomes, we expect member behaviour and the market environment to change over time.

It is therefore crucial that a strong governance framework is in place between the CPA and the Registered Providers.
We believe the design of the default strategy should undergo an evidenced based review annually to ensure that it remains fit for purpose and continues to deliver a suitable risk-return profile across age groups.

Innovation and new investment ideas should be considered as part of this review.

Case Study of Default Evolution Below we set out a case study of the evolution of our Timewise Target Retirement Funds which are our flagship funds for workplace DC schemes in the UK and Ireland.
Over time, the funds have been adapted based on changes in member behaviour, the regulatory environment and investment innovation.

2014 2015 2016 2017 2018 2019 2020 2021 Review concluded allocation remained suitable.

No changes made.

Addition of smart beta, high yield and emerging market debt.

Increased allocation to smart beta.

Evolved use of volatility management.

Review concluded allocation remained suitable.

No changes made.

ESG funds integrated to equity allocation.


Allocation to infrastructure added.

Further ESG funds added.

ESG exclusions applied.

Launched funds in 2014 targeting annuity purchase.

March 2014, pension freedoms announced.

Changes made to landing point to account for increased options available to members at retirement.

Source: State Street Global Advisors as at 30 September 2022.
4 DC Investment Strategy in a New World Recommendations for Policy Makers Based on our work with DC schemes around the world in setting their default investment strategy, we believe the following design features should remain front of mind when defining the design criteria.

Default investment options should: • Be simple for members to understand.

The default strategy may be sophisticated, however, it should be able to be communicated to members in clear and transparent terms.
• Adopt age appropriate objectives based on analysis of the expected membership.

• Have an at retirement asset allocation which reflects the reality of the uncertainty that members face when making retirement choices.

• Consider if and how environmental, social and governance considerations can be incorporated within the default.

• Focus on value for money rather than lowest cost.

Value can be added through diversification and risk management, which may add to costs.
• Be covered by a strong governance framework, incorporating annual evidence based reviews.

5 DC Investment Strategy in a New World Contact Us Endnotes Paul Dunne Head of Distribution — Ireland Paul_dunne@ssga.com T: +353 1 7763029 1 99% of the members in the UK’s National Employment Savings Trust are in the default fund: Retirement Outcomes Review: interim report (fca.org.uk).
2 gov.ie — Launch of the Final Design Principles of an Automatic Enrolment (AE) Retirement Savings System for Ireland (www.gov.ie).

3 gov.ie — Launch of the Final Design Principles of an Automatic Enrolment (AE) Retirement Savings System for Ireland (www.gov.ie).

4 Workplace-defaults-better-member-outcomes_ FINAL-.pdf (thepeoplespension.co.uk).

5 New Choices Big Decisions (2015-2020), Ignition House.

6 Global Retirement Confidence Monitor (2016), State Street Global Advisors.
This survey was conducted in partnership with TRC Market Research and BRT, using a panel of 2,817 retirement savers.

Data collected in May 2016. ssga.com Information Classification: General Access Marketing communication.

Professional clients only.

Ireland: State Street Global Advisors Europe Limited is regulated by the Central Bank of Ireland.

Registered office address 78 Sir John Rogerson’s Quay, Dublin 2.

Registered Number: 49934.

T: +353 (0)1 776 3000.

F: +353 (0)1 776 3300.


Important Information The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation.
This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.

The information provided does not constitute investment advice as such term is defined under the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation and it should not be relied on as such.
It should not be considered a solicitation to buy or an offer to sell any investment.

It does not take into account any investor’s or potential investor’s particular investment objectives, strategies, tax status, risk appetite or investment horizon.

If you require investment advice you should consult your tax and financial or other professional advisor.
This communication is directed at professional clients (this includes eligible counterparties as defined by the Central Bank of Ireland (CBI) who are deemed both knowledgeable and experienced in matters relating to investments.

The products and services to which this communication relates are only available to such persons and persons of any other description (including retail clients) should not rely on this communication.

Investing involves risk including the risk of loss of principal.
All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.

There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The views expressed in this material are the views of Alistair Byrne, Head of Retirement Strategy, and Olivia Kennedy, Senior Defined Contribution Investment Strategist, State Street Global Advisors, through the period ended 30 September 2022 and are subject to change based on market and other conditions.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
The returns on a portfolio of securities which exclude companies that do not meet the portfolio’s specified ESG criteria may trail the returns on a portfolio of securities which include such companies.

A portfolio’s ESG criteria may result in the portfolio investing in industry sectors or securities which under perform the market as a whole.

Diversification does not ensure a profit or guarantee against loss.
Please refer to the Fund’s latest Key Investor Information Document and Prospectus before making any final investment decision.

The latest English version of the prospectus and the KIID can be found at ssga.com.

A summary of investor rights can be found here: https://ssga.com/library-content/ products/fund-docs/summary-of-investor- rights/ssga-investors-rights-summary- non-etf-ireland.pdf.
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Date: 31/10/2023 6 DC Investment Strategy in a New World