Unleashing DC Innovation

By David Hutchins, Senior Vice President, Head of AB's multi-asset solutions business, EMEA

Serving Defined Contribution (DC) schemes with market leading investment solutions and outstanding client support is a strategic priority for AllianceBernstein (AB) globally. Our flexible and proactively managed target date fund (TDF) solutions address the needs of DC members saving to and through retirement across the UK, the USA, and in parts of Asia. We launched our innovative TDF solutions in 2005, then in 2009 we established our first suite of UK TDFs for our own staff scheme. We manage £87 billion in DC client assets globally, as at 30 June 2023.

Being at the cutting edge of innovation in DC pensions requires deep and ongoing research. That is what we’re committed to. Today we are proud to be delivering investment innovation for the DC default of our clients’ portfolios across ESG, illiquid assets, and decumulation.

Innovating in Environmental, Social and Governance (ESG)

Material ESG considerations, including a deep understanding of climate change risk, are built into our DC investment solutions. We are focused on understanding and managing the financial risks and opportunities relating to ESG to help improve member outcomes.

Since 2021 we have been building an allocation in a proprietary sleeve which, through sustainable investments, offers diversification to help enhance returns. We seek attractive characteristics in income (near-term cash flows), inflation (inflation linkages or sensitivity) and investment impact (deployment of capital to new sustainable projects). The allocation includes holdings in renewable energy infrastructure including wind, solar, and battery storage, and digital infrastructure that serves to connect and empower individuals and businesses.

AB has been well prepared to deliver on the detailed ESG reporting that is now a standard requirement for DC schemes. Our client reports include ESG scores and ratings, and a range of carbon metrics including those mandatory for Task Force on Climate-related Financial Disclosures (TCFD) reporting. AB has been intentional about ESG in our investment research and through the implementation of portfolio tilts and allocations in our TDFs since 2018.

Since 2021 we have been building an allocation in a proprietary sleeve which, through sustainable investments, offers diversification to help enhance returns. We seek attractive characteristics in income (near-term cash flows), inflation (inflation linkages or sensitivity) and investment impact (deployment of capital to new sustainable projects). The allocation includes holdings in renewable energy infrastructure including wind, solar, and battery storage, and digital infrastructure that serves to connect and empower individuals and businesses.

AB has been well prepared to deliver on the detailed ESG reporting that is now a standard requirement for DC schemes. Our client reports include ESG scores and ratings, and a range of carbon metrics including those mandatory for Task Force on Climate-related Financial Disclosures (TCFD) reporting.

Innovating in Illiquid Assets

Accessing illiquids is an important recurring challenge for DC schemes. We are committed to deepening the investment diversification of our TDFs to help further enhance returns through allocations to private markets.

In 2021, we demonstrated that private equity exposure can be implemented in a UK DC solution via TDFs and in 2022 we increased that allocation in our clients’ portfolios. This allocation has been a significant contributor to our clients’ investment performance through 2023.

We have conducted an extensive project on private credit for DC schemes aimed at: considering the benefits of a potential allocation, solving implementation hurdles (including pricing and platform access), and selecting external manager strategies to implement for a pilot custom DC client. This project has strengthened our knowledge of DC best practice as it relates to investing in this asset class. This proprietary sleeve will be made available across our DC client base.

Innovating in Decumulation

Turning a DC savings pot into a reliable, sustainable income without sacrificing capital is now one of the industry’s biggest challenges, as early DC savers increasingly reach retirement. AB has innovated its TDFs to make the member’s journey as seamless as possible by providing a default to and through retirement.

Based on our deep knowledge of DC we have created an institutionally priced drawdown product that combines our accumulation TDFs with our tried-and-tested retirement income TDFs, which launched in 2015. Our income-paying TDFs have delivered a high-and-rising level of income while maintaining capital values and preserving the option for DC members to annuitize on equivalent or improved terms.

The resulting default solution, in line with the DWP’s call for a decumulation framework to support members at the point of access, is a Whole of Life fund range that enables a seamless default journey.

This paves the way for AB to deliver a Collective Defined Contribution (CDC) proposition via TDFs for clients in-scheme and through partners. The CDC structure we have designed enables fair treatment between members from different socioeconomic groups and seeks to deliver value for money by optimizing outcomes, well within the charge cap.

We remain committed strategically as a business globally to supporting DC schemes through innovation for better member outcomes.

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Some of the principal risks of investing in Target Date Funds include:

Market Risk: The market values of the Fund’s holdings rise and fall from day to day, so investments may lose value. Interest Rate Risk: Bonds may lose value if interest rates rise or fall—long-duration bonds tend to rise and fall more than shortduration bonds. Credit Risk: A bond’s credit rating reflects the issuer’s ability to make timely payments of interest or capital— the lower the rating, the higher the risk of default. If the issuer’s financial strength deteriorates, the issuer’s rating may be lowered and the bond’s value may decline. Allocation Risk: Allocating to different types of assets may have a large impact on returns if one of these asset classes significantly underperforms the others. Foreign Risk: Investing in non-UK assets may be more volatile because of political, regulatory, market and economic uncertainties associated with them. These risks are magnified in assets of emerging or developing markets. Currency Risk: If a non-UK asset’s trading currency weakens versus sterling, its value may be negatively affected when translated back into sterling terms. Reinsurance Risk: The underlying fund(s) is accessed via another insurance provider, also known as a reinsurance arrangement; creating a direct counterparty exposure. In the event of default by an insurance provider, the value of the assets will likely fall, which will be reflected in the value of our Fund price.

Target Date Retirement Funds (TDFs) are designed for a typical pension fund saver intending to retire in or ar The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time.

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