Scottish Widows is bulk switching its workplace pension customers into a pension freedoms-friendly default fund, away from lifestyle defaults targeting annuity purchase.
The provider will soon write to advisers of schemes with annuity lifestyle default investment strategies notifying them of correspondence with employers and scheme members that will give three months’ notice of the move to a fund which is targeted at flexible access in retirement.
Providers have traditionally shied away from transferring scheme members to a more suitable investment option without their formal written approval for fear of regulatory comeback in the event that the new fund delivers worse performance. Mass communication programmes suggesting members switch to a more suitable scheme typically see only minimal levels of engagement. Scottish Widows says its governance structure facilitates switches to more suitable defaults.
Under the lifestyling approach, pension funds are typically invested in riskier, higher growth assets when the saver is young, but progressively moved to less risky investments, such as cash or fixed interest, five to 15 years before retirement. Scottish Widows has found that around only 25 per cent of customers are opting to take an annuity since pension freedoms were introduced, making this investment approach unsuitable for the majority.
Scottish Widows launched a series of lifestyle investment options – Pensions Investment Approaches (PIAs) – for customers approaching retirement in April 2015, allowing them to select glide paths that reflect taking a fixed income, encashing or going into drawdown and remaining invested.
Customers who plan to follow an alternative retirement journey, such as full encashment or purchasing an annuity, can opt out and will be assigned the investment approach appropriate to them. Those who are within five years of retirement will remain in their current default fund unless they opt to switch.
Scottish Widows pensions director Ronnie Taylor says: “For customers to make the most of the new freedoms, they really need to think about the way they want to use their pension fund in later life at least five years before their retirement date and ensure they pick an investment glide path to accommodate it.
“But despite our best efforts to draw attention to the issue, many customers remain disengaged and, where this is the case, we believe it’s important and in their best interests to take action on their behalf.”
“Unlike many other providers, our products have been designed in a way that allows us to make changes as part of annual governance reviews, which has enabled a bulk switch to a more appropriate default fund.
“We have been studying customer behaviour since the introduction of the freedoms and when it became clear that the majority of customers planned to remain invested or to use drawdown, we decided to change our default option accordingly.”