Setting a specific target and decreasing risk as that target is met has helped defined benefit (DB) default funds outperform their defined contribution (DC) counterparts, according to global bond fund manager PIMCO.
DB funds returned on average 0.57 per cent more per year over the past 15 years for a cumulative total of 9.12 per cent, with lower volatility, PIMCO stated in its research paper ‘Defined Contribution Funds: Target setting can pay off’.
This demonstrates the benefits of having a clearly defined target or minimum required rate of return in achieving superior investment returns, according to PIMCO account manager, Sara Higgins.
Although they have fallen out of vogue in Australia, research shows that a focus on target setting for overall portfolio performance and risk outcomes leads to better performance, she said.
The purpose of both DB and DC funds should be to maximise the retirement savings of members in spite of their different structures, and it is important to think about what constitutes a good outcome, Higgins said.
“Success could perhaps be defined as the likelihood of meeting a real replacement income target for a certain proportion of members; a liability driven approach that de-risks as the objective is met. This adds to the discussion around the evolution of a dynamic target date or lifecycle approach,” she said.
