Lifestyle and target date pension funds are outdated, Ros Altmann told the National Employment Savings Trust consultation on the future of retirement, prior to her appointment as pensions minister.
Following the changes announced in last year’s Budget, several providers told FTAdviser they were reviewing their ‘default’ schemes. At the time, Morten Nilsson, chief executive of Now: Pensions, said that lifestyle funds assume that savers are on a journey that typically ends with an annuity purchase, which is not the case anymore.
In her response to Nest, Ms Altmann said that defined contribution pensions schemes will need to reconsider the investment options offered and the default funds used following last year’s Budget changes.
“These standard investment funds used by millions of pension savers are ‘lifestyle’ and ‘target-date’ default funds, which assume pension savers will buy an annuity at a pre-set age.”
She continued that the fund switches all a members investments into cash and bonds by the time they reach what was expected to be their pension age, which may no longer be suitable for many of those approaching retirement.
“In future, many people will not know their retirement date well in advance and, although some will still buy annuities, the majority may not and probably not with their entire pension fund.
“Experience in other countries, such as Australia, suggests the new UK regime will trigger demand for pension schemes that can provide both investment growth and some income during retirement,” said Ms Altmann.
“Therefore, the most successful pension funds may be ones that not only take people up to retirement but can also help them through retirement too.”
While managing behavioural risks is being achieved via auto-enrolment itself, providers need to then try to engage members, rather than assuming they remain inert. “Managing investment risks and returns on their behalf over the long run should be the aim of the pension fund and helping members with financial planning, incorporating pension savings with other assets and the benefits of working longer could all be explained.”
Elsewhere, Ms Altmann said that there are many risks for DC savers approaching and in retirement and that some of these risks require different approaches to others.
“Perhaps providers should focus on the investment risks and returns and try to ensure members with different circumstances can have the best chance of optimising their long term outcome, whether that be in taking the cash or taking an income or just leaving the money investment for the long term even through retirement.
“For example, some of the money could stay invested and be used to help with long-term care costs of needed. Currently, there are no savings plans for care.
Earlier today (29 June), Nest revealed it is set to offer a later life annuity and a default drawdown product in its retirement income ‘blueprint’.