Bull’s-eye for TDFs

Target date funds have taken the hearts of corporate advisers by storm, occupying half of the Ultimate Default Fund Top 10. John Greenwood takes a closer look

Target

Among the earliest casualties of the Chancellor’s sweeping changes to the pensions system were the many default funds that had been set up to target annuity purchase. Within hours of George Osborne finishing his Budget 2014 speech, obituaries were being written for the standard lifestyle defaults that to this day hold the retirement fortunes of millions of Britons.

While the rug has been well and truly pulled from underneath traditional lifestyle funds, 2014 gave target date funds and master trust arrangements an opportunity to show off
their flexible qualities. No single fund can target all three main possible outcomes – cash, drawdown and annuities – but TDFs, which are massively popular in the US, at least have the flexibility to plot a path of best fit between these goals, based on the provider’s understanding of the profile of schemes’ membership. 

Traditional lifestyle funds, on the other hand, are left with the dilemma of knowing that savers are probably, in many cases, targeting the wrong outcome but are unable or unwilling to switch allocation without the express consent of the scheme member.

The flexibility of TDFs clearly appeals to the members of the Corporate Adviser Panel, which is made up of senior DC representatives of several of the UK’s largest pension consultancies. The panel gave the crown of Ultimate Default Fund 2015 to the AllianceBernstein Flexible Target Date Fund at February’s London awards ceremony, applauding its flexibility, transparency and adaptability. Not only has AllianceBernstein’s target date offering taken top spot but JP Morgan Asset Management was highly commended by the judges for its SmartRetirement Target Date Funds proposition. 

In fact, the past 12 months have seen TDFs make a real impact in the hearts and minds of corporate pensions professionals, with five of this year’s Ultimate Default Fund Top 10 being run on a target date basis.

Thinking ahead

Nest’s decision to opt for a target date structure has clearly given comfort to employers, trustees and advisers considering default fund selection. But AllianceBernstein won over the Corporate Adviser Panel with its forward-thinking attitude to the challenges faced by employees transitioning into retirement. Panel members applauded the provider’s foresight and leadership in offering its Retirement Bridge before the Budget changed the world forever – having promoted the collectively managed drawdown approach, now seen as the leading strategy for medium-sized pots, for years.

TDFs have not been without their critics, however, and some suggest they too could soon go the way of lifestyle funds as workplace pension scheme investors demand increasing flexibility from their funds.

Aviva head of pensions John Lawson does not like the devolution of too much power to the TDF’s manager when it comes to setting de-risking asset allocation. 

He says: “I would be the first to say lifestyle is not ideal in the new world. But lifestyle funds performed considerably better than target date funds in the US did in 2008 and 2009 because they deliberately take the manager out of the picture and instead are controlled by an algorithm. The managers of the target date fund, on the other hand, were saying ‘I believe equities will outperform’ and then they crashed. This was a disaster in the US – no one can call the future.”

AllianceBernstein pensions strategies group managing director Tim Banks says: “The problems in the US in 2008 were down to a labelling issue as to whether the funds were to retirement or through retirement. People didn’t lose out if they remained invested and, in the UK, that labelling issue has been addressed.”

Banks does not accept the view that managers cannot add value when making calls on asset allocation strategy.

“Our performance debunks that myth,” he says. “And in any event, it is impossible to have passive asset allocation. Someone somewhere has always taken a view on asset allocation. We have a professional portfolio manager doing that.”

Another criticism pointed at TDFs is that, because they traditionally target a single date for an individual’s retirement, they do not reflect the realities of the divergent retirement behaviour of today’s workers.

“Lifestyle is clearly no longer appropriate either,” says Lawson. 

“But we need to accept that people are going to take a range of options – guarantees, cash, income – and not all from a single age. There has to be a default, which should be a passive fund, and its main aim should be to limit volatility. 

“In future, the aim will be targeting volatility constantly between the age of 54 and 90,” he says. “There could be a place for target date funds at a date where you might buy an annuity, for example, age 73 or 74, when the mortality cross-subsidy makes it too hard to beat returns in drawdown.”

Banks says his funds already address this. “Members rarely know when or how they are going to access their savings. Aiming at a broad retirement window seems a lot more helpful than a particular date.

“Individuals may think they have certainty around what they want, in which case they can use self-select options and advice,” he says.

AllianceBernstein was applauded by Corporate Adviser Panel members for the way its Retirement Bridge proposition takes members into retirement within a low-cost drawdown arrangement, benefiting from institutional pricing structures.

The BlueSky Pensions master trust – which in September 2014, when Retirement Bridge went live, had 23,000 members and £270m of assets – was the first scheme provider to offer the Retirement Bridge as part of an integrated default strategy, enabling members to transition from paying into their pension pot to taking a sustainable income in retirement.

The regulatory landscape of work-to-retirement distribution is moving very quickly. January’s publication of the FCA’s Final Guidance paper 15/1 on retail investment recommendations appears to suggest that providers will be on the hook with the Financial Ombudsman Service and Financial Services Compensation Scheme where advice is given without a personal recommendation. While FG15/1 will not apply in the trust-based world in which the likes of BlueSky operate, we may see an equivalent form of second line of defence requirement adopted for occupational schemes.

Whether this will affect the way TDFs are able to take members through the first decade or so of their retirement remains to be seen. But wherever the rules land, target date structures look set to take a big part of the action.

The Corporate Adviser Ultimate Default Fund Top 10

Winner

AllianceBernstein Flexible Target Date Fund

Highly Commended

JP Morgan Asset Management SmartRetirement Target Date Funds

The Shortlist

  • Birthstar Target Date Funds
  • BlackRock LifePath Target Date Funds
  • Legal & General Worksave Mastertrust Default Fund
  • Nest Retirement Date Funds
  • Royal London, formerly Scottish Life Balanced Lifestyle Strategy (Pension & Cash)
  • Schroders DMAF (Dynamic Multi Asset Fund)
  • Scottish Widows Balanced Pension Investment Approach
  • Standard Life Active Plus III Strategic Lifestyle Profile