De-risking and the transition to retirement remain colossal challenges for workplace pensions. John Lappin hears praise for solutions that target death not retirement
Finding the best solution for the de-risking of pension assets within defaults remains one of the primary challenges facing the industry, with target date funds seen as a substantial improvement said delegates at the Corporate Adviser/HSBC Workplace Retirement Services forum in London in the summer.
Speaking at the event – Reshaping Default Funds For The Auto-enrolment World – P-Solve director Damian Stancombe said that the funds had proved very saleable in America, although they had made mistakes with some funds still sitting 60 per cent in equities in 2008.
He said the issue in the UK with target date funds was in future less people would have a cliff edge retirement date. He argued this meant the real target should be when you die.
LCP head of DC investment Paul Black added: “We have to look at the two things separately. What assets do we want to be invested in at any time and how do we deliver it. We may deliver it through target dated funds. Retirement is not going to be the cliff edge. But if you have 60 per cent equities with two years to retirement that is an asset allocation problem not a target date return problem.”
Bluefin head of consultancy solutions Jonathan Phillips said that labels had been placed on funds without proper reference to the underlying risk in the US, though tighter UK regulation would prevent that in the UK. He also felt target date was easier to understand than life styling.
HSBC Workplace Retirement Services investment services manager Lorraine Fraser suggested that a lifetime’s savings fund would be a better approach but the weight of years of legislation was focused on the retirement age.
Hymans Robertson senior investment consultant Anthony Ellis added: “You have to have the flexibility to work more if you haven’t got enough in your pot. This arbitrary cut off point of 65, 67, 68 or whatever it is going to be is a bit daft. You wouldn’t take a decision on a single day to take your lifetime’s wealth and strip it out of equities and buy an income on a particular day otherwise.”
Jelf head of benefits strategy Steve Herbert said: “Target date is an improvement on life-styling. The biggest pension scheme will be Nest with all those people in a target date fund. It is quite a sellable story to the media.”
But Herbert said knowing a precise date was actually going to get more difficult because people were not going to have the underpin of the state retirement age to allow them to retire.
Delegates suggested this all raised a significant issue for human resources departments. Black said: “The big issue is the HR policy. They need to contribute enough money to their pension so they can get them to retire when they hit a certain age, so they can bring in somebody else. But it is really difficult because people won’t be able to afford to retire.”
This provoked another discussion about annuitisation, with Black arguing annuitisation had a place for low and middle earners, but adding: “It might be necessary to make income drawdown accessible for those with pots of less than a half a million. That is a lot of people finding ways to make things more flexible there. Though at some stage annuitisation will still be appropriate for the vast majority of people.”
Delegates were asked if responsibility for retirement income should continue to rest with the employer scheme. But Stancombe said it would need to drop into an individual arrangement in some way. He said this happened in Holland where, even if individuals could still benefit from the buying power of their scheme, those decisions became their responsibility.
Delegates were all agreed that any default arrangement had to offer an ethical and a sharia option as well.
Advisers at the event felt that employers would prefer one scheme provider rather than multiple providers though that might depend on the market. Herbert said: “A lot of employers can’t get the terms so they are looking at two tiers. Most would rather have one.”
Delegates felt that Nest would be seen as the safe option out of the three lower cost offers. If it went wrong it could be blamed on the Government, it was suggested.
There was a general feeling that the sophistication of the new arrangements and the new system would grow with time.
Black said: “We have talked about how an investment works for DB. How come it doesn’t work for DC? We have been discussing annuitisation and how that could work through LDI. In a DB scheme for a forty-year-old we would be hedging the interest rates. Why don’t we do it for DC? We should be doing that strategically. Are we starting the right place?
“We are putting in more resource into DC and coming up with innovation solutions, but the more you get away from the main crowd, you may think this works but is there too much risk? Do we all head off into the same direction? Hopefully, we are all going to do something slightly different, there will be more variation and it will be a lot cleverer.”
Phillips said: “We are at a difficult time in the emergence of DC. The funds are not large enough to put some sophistication into them and the products aren’t ideal. It will be easier when the weight of money increases. Today’s glide paths reflect the reality of the situation. You are not trying to create something that is absolutely right but something that is not wrong. It will be satisfactory initially. Then we will all have a look at it again.”
Stancombe said practices such as Liability Driven Investment would be applied to DC. But he hoped innovation would not be regulated out of the system before it was possible to prove value for money.
Advisers also thought there was an issue on the type of default funds offered within legacy pensions against the backdrop of the introduction of auto-enrolment.
For the most part delegates were sceptical that these would be changed, given the scale of the task and the fact that many people had chosen to go into these funds though perhaps on the advice of an adviser who might not be in business any more. It was suggested addressing legacy pensions issues might form part of the small pots work being done by the DWP.
With auto-enrolment taking money out of people’s pockets without their say so, the pressure is on for the industry to develop solutions that reduce the risk that money is exposed to. Cracking the de-risking challenge remains one of the biggest tasks facing providers and advisers.