BNY Mellon

BNY Mellon

A dynamic approach to investing for retirement could deliver better outcomes


BNY Mellon asked Cass Consulting to examine the way that defined contribution (DC) pension schemes are currently run, as they currently produce unsatisfactory results for many members. After reviewing the academic literature, the academics suggested a strategy that is more tailored to the individual's situation. Instead of simply trying to maximise the pension pot, a better outcome for members would be achieved if those running the scheme should aim to reduce the chances of a large shortfall, to adopt a more dynamic investment strategy, and to tweak that strategy according to the individual's loss-aversion profile.


Most DC schemes are run on the so-called Rip Van Winkle strategy: contributions are invested in equities, on the grounds that they are a high-return investment, until ten years before annuitisation. At that point "lifestyling" occurs, and the pot is gradually switched into government bonds until at retirement age the DC member cashes in the annuity.

This treats all people of similar age the same, irrespective of their objectives in retirement, and how close individuals are to achieving their target retirement incomes, or even the state of the financial markets. Unsurprisingly, this one-size-fits-all approach often gives bad outcomes.

BNY Mellon, a global investments company, asked Cass Consulting to look at alternative approaches.


Cass's consultants discovered that current practices produce what the industry calls the "desired" income of two-thirds of the member's salary immediately before retirement just 12% of the time. On average DC schemes produce a retirement income of 43% of final salary, and there is a 70% chance of failing to reach what the industry considers the "satisfactory" level of 50%.

The academics suggested three things. First, that asset allocation should be more dynamic and the aim should be not to maximise the pot, but to minimise the likelihood of not achieving the required replacement ratio. Second, that members should be able to bring forward or delay annuitisation, or to annuitise over time. Third, that the risk-aversion bias - a cornerstone of behavioural economics -should be built into asset allocation to ensure that gains are safeguarded, ie that money should be moved into bonds earlier if markets have performed well.


The academics' calculations found that if their suggestions were enacted, the chance of hitting the income target of two-thirds would increase from 12% to 34%, and the chance of failing to hit 50% would reduce from 70% to 48%. Evidently, the current industry-standard strategy for running DC pension schemes is not giving members the outcomes that they desire, but a more dynamic, personalised one could easily increase their pension pots and improve their standard of life in retirement.

Cass consultants:

Andrew Clare

Professor Clare was formerly a Senior Research Manager in the Monetary Analysis wing of the Bank of England, which supported the Monetary Policy Committee. He serves on the investment committee of the £4bn GEC Marconi pension plan, and is a trustee and Chairman of the Investment Committee of the £3.0bn Magnox Electric Group Pension scheme.

Douglas Wright

A former employee of Scottish Provident Life Assurance, Dr Wright has been a lecturer in Actuarial Science at Cass since 1997 and Course Director for the MSc in Actuarial Management since January 2008.

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