Telent futureproofs its default investment strategy

Telent

Futureproofing its default investment strategy against potential legislative change was a key objective for technology services firm Telent. However, when it introduced its current arrangement in 2013, it could not have predicted just how radical the pension reforms that took effect from April 2015 would be. And while built-in flexibility was not deemed to be a must have for its default strategy, the fact this is included with this has enabled the organisation to respond positively to the new arrangements.

The default investment option available through Telent’s contract-based defined contribution (DC) pension scheme, provided by Standard Life, is a lifestyle profile that offers employees four options as they near retirement. The first is designed to help members buy an annuity at retirement, the second to take a lump sum, the third if they wish to go to drawdown, and the fourth if they want to keep their options open.

Peter Harris, director of pensions at Telent, says: “When you’re more than 10 years from retirement, all four of those options are invested in exactly the same way and it’s only when you get to 10 years out that you start going down one of those four routes. If [members] don’t make any decision, they go down the keep-your-options open route.”

Currently, 95% of Telent’s pension scheme members use its default investment option. Of these, 40% are in the default that was introduced in 2013, while the remainder are in an older default structure, depending on when they joined the scheme.

Harris believes it is vital to ensure a scheme has a strong default strategy in place to make it as easy as possible for employees to achieve a good outcome at retirement, particularly if they are not used to making financial decisions.

“In any default option I’ve come across, in the long-term option from retirement, there’s a really heavy investment in equities, so people need to understand that they are going to see their pot go up and down,” he explains. “If people don’t understand that, there’s a real danger we’re putting £2.5m a year into people’s pensions [and] they’ll say ‘you’re getting me to put my money in this and it’s dropped in value this year’. We’re almost destroying value in running a pension scheme unless people can understand what’s happening.”

Managing employees’ expectations, therefore, goes a long way towards engaging pension scheme members with their retirement savings. “Every time that I sit and talk to people about the level of contributions necessary to generate a certain size of pension, I always horrify and scare people to death,” says Harris. “People are amazed by the level of contributions they need to make to generate the pension they would like.”

To ensure that Telent’s default investment strategy continues to perform effectively, the organisation reviews it regularly. “We have a Standard Life [representative] coming in to talk to us every six months,” explains Harris. “We’re questioning whether we need to do it that frequently. Fundamentally, we should keep our eyes on it and we should make sure we hold our feet to the fire and make sure [it is] being watched but, if we get six months of shortfall and six months of good performance, are we going to make any changes or any decisions on the basis of six months? I doubt it.

“Investment is a long-term thing. It needs to be monitored. My current feeling is that annually is sufficient. Have a look at the reports as they come out but for a formal review I think annually is enough to fulfil what we see as our duty to watch this.”

Ultimately, investing the time and resources in implementing and maintaining the right default investment strategy will pay dividends for both employers and staff.