Two members, the same age, an entirely different starting position.
Why, then, do we approach them with the same investment logic?
A false dichotomy
In Pensioen Pro of 6 August, Anne Laning rightly argues that the debate on freedom of choice should be conducted empirically rather than ideologically: which design has the lowest implementation loss relative to the optimum? We fully share that starting point.
But the debate remains stuck in a single contrast: collective versus individual. In our view that is a false dichotomy. The decisive variable is not the governance structure, but the information on which the board steers. There is a third way: not more choice for the member, but better steering information for the board, so that collective policy aligns more precisely with where different members actually stand relative to their pension objective.
One lifecycle scale, a spread of positions
Within a single age cohort, accumulated wealth, contribution history, salary path and household context vary widely. The investment scale is calibrated to the cohort average, and is therefore by definition mis-set for members at the edges of that distribution. Those who are already close to the objective may, under the same scale, be taking too much risk; those who still face a substantial funding gap, too little. Not because collective policy is wrong, but because age only partly explains a member's position relative to the objective.
Age determines the retirement date. Not the financial position on the way there.
The question shifts
No longer: "how much risk suits someone aged 45?" But: "where does this member stand relative to an appropriate reference objective, and what does that mean for risk within collective policy?"
A reference objective is not an individual pension promise. It is a way of making the collective ambition measurable across different member positions. It is derived from, among other things, pension ambition, contributions, horizon, salary growth and actuarial-financial assumptions, and then tested with scenarios. That means connecting existing data more tightly:
- pension objective
- accumulated wealth
- contributions and salary growth
- remaining horizon
- required return and probability of reaching the objective
No individual portfolio, and no winners and losers
This does not mean that every member gets their own investment portfolio. It is a target-based analysis of risk within the chosen investment framework. The member does not need to be at the wheel; the board steers, and in doing so protects the vulnerable member, centrally.
The obvious objection is: if you differentiate risk by member, is this still collective, and do you not create the winners and losers Laning warns against? The opposite is true. Precisely because the member does not choose, the board can see earlier and more precisely which groups are drifting away from their objective, and protect them within collective policy.
Differentiating information is not fragmenting responsibility.
The test: the same portfolio, different information
The strongest test does not initially even require a different asset allocation. First let the board see the same collective portfolio it already runs today. Then add the target-based information layer. If the board thereby identifies different risks, recognises different groups as vulnerable, asks different policy questions and can monitor more effectively, the governance value of that information layer has been demonstrated, without having to prove that it produces a "better portfolio". That is a low-threshold and empirically testable claim.
Illustrative (model-based, not a realised outcome): within one cohort, and therefore under one lifecycle scale, the probability of reaching the pension objective can range from around 55% for the bottom quartile position to about 85% for the top, measured by coverage of the reference objective. The cohort average looks healthy and conceals that difference. A board without this information layer does not see the tail of the distribution.
Illustrative and model-based. Not a realised outcome and not a guarantee.
The technology to connect ALM, actuarial information, member data and scenario analysis more tightly is available. WorldView Investment Management combines actuarial and financial-economic models for that purpose, built by a team with decades of institutional experience in portfolio construction and risk management.
Where the gain lies
The real gain may not lie in more choice, but in less distance between what is decided collectively and what can appropriately be achieved for different members. An age cohort is a good starting point, but need not be the end point of the analysis.
In a follow-up we will show how the reference objective is derived and how the added value can be tested empirically with historical periods and stochastic scenarios.
Not more freedom of choice. Not more complexity. Better steering information for the board.
From cohort average to target-based steering information
Pension funds
We connect ALM, actuarial information, member data and scenario analysis into steering information that helps your board see and protect vulnerable groups earlier.
See our approach for pension fundsSchedule an introduction
We are happy to discuss steering information that makes collective policy more precise, without more choice or more complexity.