Target date funds no easy answer to default dilemma

Proposals to introduce target date funds as a personal accounts default strategy prove a far greater challenge than originally anticipated, delegates at the Corporate Adviser DC Summit heard.

Initially touted by the Personal Accounts Delivery Authority (Pada) as both easy to communicate and administer, target date funds have been labelled more complex than some of their more traditional lifestyling counterparts.

Jim McCaffrey, head of EBC distribution at Scottish Widows, said: “Target date funds presuppose that individuals have a clue about when they will retire, but that will change over time. You might end up needing a lot of choice to satisfy the fact that people don’t know when they are going to retire.”

McCaffrey’s comments come in the wake of several announcements from the two main political parties about changes to the state retirement age.

Paul Gilbody, head of product and scheme promotion at Pada, conceded that communicating target date funds was a challenge, but maintained the most important factor was ensuring the member had a suitable amount of choice in the amount of risk within their individual fund.

“The point here is about transparency, communication and more flexibility,” Gilbody said. “Does the default fund have the appropriate level of risk? If individual members want the choice [to invest in a higher risk fund] then we should give them the opportunity to do so.”

However, Andy Barton, employee benefits and direct distribution director at Scottish Widows, noted that following poor performance from target date funds in the US, lessons had to be learnt about appropriately communicating how the vehicles work.

“There is growing evidence from the States that [target date funds] are in some ways harder to communicate, as people see them as guaranteed,” he said.

Barton argued that Pada will need to make clear not just how the vehicles work but also what asset classes are held within them to ensure members are suitably invested as they near retirement.