The pension changes announced in the 2014 Budget have cast great uncertainty on the traditional management of the default fund and lifestyling strategies.
Now that members have the freedom to access their pension funds whenever they wish (once they have reached the age of 55), it is harder to manage the default fund so that it is likely to give a good outcome for members.
The default fund has been part of the pensions landscape since the dawn of defined contribution (DC) schemes. Its purpose is to provide a safe haven for members who do not feel confident to make their own investment decisions, or who are disinclined to do so.
Default funds often make use of a ‘lifestyling’ strategy, so that when the member is approaching retirement (often 10 years before their normal retirement date), their investments are gradually moved from riskier assets, such as equities, towards safer assets, such as cash. This lessens the risk of a sudden drop in the fund’s value just before retirement.
The Budget made sweeping changes to the pensions landscape, and until people have started to retire under the new rules, it will be hard to predict what their behaviour might be, and at what age people will choose to take their pension. It is therefore difficult for pension schemes to determine how to alter the management of their default fund, and it will be important for schemes to monitor the situation so they can make any appropriate changes in a timely manner.
The key to future success is for schemes to have a good knowledge of their employee members so that they can tailor an appropriate investment strategy. The best way to do this is by speaking to members about what they would like to achieve from their pension, explaining what they are realistically likely to achieve from their current savings compared to where they would like to be at retirement.
The Pension Quality Mark has noted an increase in schemes carrying out a review and refresh of their default investment strategy. Some schemes have simplified the default options so they are easier for members to understand; others have reconfigured their selection of funds align investment growth more closely with members’ needs.
Any changes a scheme would like to make to its default investment strategy must fall within the 0.75% charges cap due to come into force in April 2015.
The true impact of the pensions changes is yet to be felt, but the best chance of securing a good outcome at retirement for default fund members is built on two core principles: to fully understand membership and keep the organisation’s scheme’s investment strategy under constant review, so it is best placed to meet members’ needs.
Justine Tate, managing director, Pension Quality Mark (PQM)
If you read nothing else, read this
- Pension plan default investment funds often use lifestyling so that investments are moved from riskier assets to safer ones as members get closer to retirement.
- The changes announced in the Budget mean it is harder to predict when a member will retire, so it is harder to lifestyle a member’s assets.
- Members’ investments will have to be more tailored to individual needs.